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| What is an
FMP? |
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Mutual funds
offer Fixed Maturity Plans.
Two features make them distinct from other fund schemes:
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| Tenure |
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FMPs have a
fixed maturity date. It could be 15 days, 30, 90, 141, 180
or even 365 days. Some even have a three or five-year time
frame. Recently, Birla launched such a plan for 18 months
and 36 months.
At the end of this period, the scheme matures, just a like
a fixed deposit.
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| Investments |
| FMPs invest
in fixed income instruments, like bonds, government securities,
money market instruments (very short-term fixed return investments),
to name a few. |
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| How long is
the money blocked? |
Before the scheme
opens, the tenure is made known. You must pick a tenure most
suited for you.
Note: FMPs are either open ended (more the exception) or
close ended (more the norm). Open ended funds allow you to
enter (buy units) and exit (sell units) any time you want.
Close ended means they remain open for subscription only
for a short period of time. They then close and do not accept
any fresh deposits. They also do not allow current investors
to withdraw. So your money is locked in during that time
frame. If you need the money urgently, you can sell your
units. But you will have to pay an exit load (the fee when
you sell the units of a fund).
Close ended schemes charge a load between 1% and 2% of the
Net Asset Value (price of a unit of a fund) at the time of
withdrawal. This is referred to as an exit load and is levied
when an investor wants to sell his/her units.The reason for
this steep load is to dissuade investors from exiting before
the fund matures.
Of course, if you hold on till maturity, you will not have
to pay an exit load. Generally, there are no entry loads
for such schemes. This is a fee charged when investors buy
the units of a fund. |
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| How do they
differ from income funds? |
An income fund
will invest in the same instruments like an FMP. But an open
ended income fund will not have a fixed tenure. Because the
tenure of the scheme is fixed, it makes investing easier
for the fund manager. He can invest in instruments that will
mature around the same time the scheme matures, in one go.
So a fund manager with an FMP of a five-year maturity, for
instance, will invest only in instruments that have a five-year
maturity. Similarly, a one-year FMP will invest in one-year
maturity investments.Because of this, he can even give an
indicative return (though he cannot assure one) unlike an
income fund. |
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| How do they
differ from fixed deposits? |
The similarity
first: both have fixed tenures. The difference: a fixed deposit
gives assured returns. You know what you are getting and
when.
An FMP will give an indicative, but not assured, return.
You will be expected to invest a minimum of Rs 5,000 in an
FMP. Not so in the case of a bank deposit, which can be less. |
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| What is the
tax impact? |
If you invest
in an FMP, the dividend is tax-free in the hands of the individual
investor. If you invest in the growth option of the FMP for
less than a year, the gains are added to the investor's income
and taxed at the investor's slab rate.
If you invest in the growth option of the FMP for over a
year, you pay either 10% capital gains tax without indexation
or 20% with indexation. Indexation is the process by which
the inflation is taken into account when computing the tax
liability. To understand indexation, read All about capital
gain. |
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| What are the
returns you can expect? |
The mutual fund
will have to pay a dividend declaration tax of 14.5%. After
deducting that, returns in the hands of the investor can
be higher than a bank deposit.
Let's assume an FMP gives a return of 5.50% for a one-year
plan. Against that compare a one-year bank fixed deposit. |
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FMP
dividend option |
Bank
deposit |
| Amount
invested (Rs) |
100 |
100 |
| Return
(%) |
5.5 |
5.75 |
| Less:
Dividend declaration tax borne by the mutual
fund |
14.5% |
- |
| Personal
income tax rate |
- |
30% |
| Post-tax
return |
4.70% |
4.02% |
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| For application forms and more details, please do contact us. |
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