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Wednesday, April 27, 2011

FMP- an alternative to FD

FMP(Fixed Maturity Plan) is similar to FD(Fixed Deposit) schemes offered by banks and other companies but unlike FD  returns on FMP  are not assured.
Though  returns of FMP are not assured but actual return does not vary significantly.
FMPs are debt instruments and the corpus is invested in fixed income securities like Commercial Papers(CPs), Certificates of Deposits(CDs), money market instruments and corporate bonds.
Depending on the tenure of FMP, the Fund manager invests in one or combination of aforesaid instruments of similar maturity.
The yield on resultant yields of invested instruments, subtracted by the expenses incurred, gives the indicative returns.
Expense incurred, better called as the expense ratio  varies from .25 to 1%.
FMPs are close ended debt funds and maturity horizon varies from 1 month to 5 years. Minimum investment in FMP starts from as low as 5000 rupees.

Nowadays no entry load is applicable and as FMPs can’t be redeemed before maturity there is no question of  the exit load.
As these schemes are listed on  exchanges, investor can sell FMP on the exchange before maturity date, but presently there is very little liquidity.
Tax Implication:
Unlike FD, there is no deduction of TDS on FMP investment.
FMPs are more tax efficient than FDs.
Interest received on FDs is categorized as ‘income from other sources’.
And added to the income of the investor and taxed according to the slab investor falls in.
If FMP with growth option and maturity period more than 1 year , investor gets the indexation benefit and 20%  capital gain tax is payable (10% without indexation).
In case of FMP (growth option) and maturity period less than a year, short term capital gain is added to the investor’s income and taxed according to the tax slab in which investor falls in.
In both above cases, investing in FMP is beneficial for the investor who falls in the 30% IT tax bracket.
In case of FMP with dividend option, dividend is tax free in the hands of the investor, but fund house needs to pay the DDT (Dividend distribution Tax).
In higher interest regime FMP gives better post tax returns than FD’s

Why FMPs are riskier?
As FMPs invests in unsecure money market instruments such as commercial paper, more risk is associated with it.

Who should go for it?
FMP is suitable for investors with little more risk appetite, expecting better post-tax returns than FDs. 
FMP is more suitable for the investor falling in the top tax bracket.
Investors should go for high rated FMPs only.


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