What is FMP (Fixed Maturity Plan)
An FMP is a closed-end mutual scheme that has a fixed tenure and invests in fixed-income securities. It invests in debt securities in such a way that they mature a day or two or few days before the FMP itself matures.
Investments: FMPs invest in fixed income instruments like CDs, CPs, money market instruments, corporate bonds; debentures of reputed companies or in securities issued by Government of India and fixed deposits. Effective August 2011, an FMP needs to give an indication of how its portfolio would look like. It has to give upper and lower limits of instruments in which it intends to invest, as per their credit rating, under various asset classes like CDs, CPs, securitized debt and so on.
FMP Returns – Now, Mutual fund companies are not allowed to publish indicative yields, estimated returns are not readily available.
However, it is not very difficult to guess the rough estimated return. An FMP’s offer document should mention instruments in which the scheme plans to invest and in what proportion, plus their credit quality and yields. The yields on most instruments and their ratings are available in business dailies. They need to be adjusted for expenses of the fund. So, you can have a rough estimate of the returns by looking at the FMP offer document as well as market rates of securities in which they are investing. Typically these funds give returns similar to Bank FD rates in the market.
FMP Tenure: FMPs are available for as short as 1 Month to even more than 5 years.
Liquidity : FMPs are ideal for those investors who wish to park their funds for a specific period. They are close ended so you can only invest in them during the NFO, and redeem them only on maturity. However, these are traded on the market but the liquidity can be low.
Safety – As they invest in Good quality debt instruments, they are reasonably safe. Go with large Mutual fund house as they are less likely to do anything wrong.
FMP Taxation
Short terms capital gain – If FMP is less than 1 year, you need to pay Short term capital gains tax, which is based on your tax slab. So if you are in 30% slab, you will need to pay 30% as Short term capital gain.
Long term capital gain – If FMP duration is more than 1 year, then you pay long term capital gains tax at either a rate of 10% without indexation or 20% with indexation (whichever is lower) .
Fund companies normally issue a lot of FMPs that are slightly over a year – like 368 days, 370 days etc. so that it enjoys the benefit of lower long term capital gain taxation.
UPDATE : Budget 2014-2015 – It is proposed to increase the LTCG tax from 10% to 20% and holding period from 12 months to 36 months.(This will make Debt funds less attractive form taxation pojnt of view. Read Details
FMP Indexation benefit
If FMP has a duration which spans over 2 financial years, you can claim indexation benefit. For e.g. If FMP is issued in Mar 2014 and redeemed in April 2015, (13 months) you can claim Indexation benefit as it fall into 2 financial years.
FMP Double Indexation benefit
If FMP has a duration which spans over 3 financial years, you can claim indexation benefit. For e.g. If FMP is issued in Mar 2014 and redeemed in April 2016, (25 months) you can claim double Indexation benefit as it fall into 3 financial years.
In last 2-3 financial years, the indexation increment rate was 9-10% and return from FMP was also 9-10%. So there will be no or very little Long term capital gains tax (after using the Indexation benefit)
How an FMP is better than Fixed Deposit ( FD)? ( FMP vs. FD returns)
The major difference between FMP & Bank FD is the Post tax returns of these instruments.
Interest on Bank FDs is fully taxable and gets taxed at the highest rate at which the individual/assessee pays tax whereas the return from FMPs is subject to capital gains tax rate (for the growth option) – @10% (or 20% with indexation).
UPDATE : Budget 2014-2015 – It is proposed to increase the LTCG tax from 10% to 20% and holding period from 12 months to 36 months.(This will make Debt funds less attractive form taxation pojnt of view. Read Details
FMP returns comparison as compared to FD
| Fixed Deposit | Fixed Maturity plans (FMP) | |
| Investment (01/07/2013) |
100000 | 100000 |
| Maturity 01/07/2014 |
366 days | 366 days |
| Interest / Approx Return |
9% | 9% |
| Interest / Approx Return |
9000 | 9000 |
| Maturity Amount | 109000 | 109000 |
| Tax Basis | 30% Tax on Interest for Highest slab | capital Gain Tax – 20% after Indexation |
| Tax | 2700 | -159 |
| Amount received (Post tax) | 106300 | 109000 |
| Post Tax yield | 6.30% | 9.00% |
NOTE that – Rate of return on FMP is not fixed and advertised. However, approximate return is known based on invstments disclosure made by fund.
How an FMP is different from a debt fund?
Interest rate volatility – Unlike a Debt fund, Investment in FMP has no influence from interest rate volatility. The securities in FMP portfolio are held till maturity and therefore it is not affected by any fluctuation in interest term over its term.
Summary
FMP is more beneficial to people who are in 30% tax slab. The pre-tax returns will be similar to FD but it is more tax efficient and post tax returns for FMP will be higher than FD. If you invest tin FMP with 1 year or more duration, the earnings will be virtually tax free (with the indexation benefit).
Current Open FMP Offers
You can check the current open FMP offers at the link below
https://www.moneycontrol.com/mutual-funds/new-fund-offers
You will find open FMP offers under “Debt” tab.