Fixed Maturity Plans

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By :Abhay Gupta
4/14/12

Sagar Maity

Introduction

With the abolishment of Section 80L (of the Income Tax Act), the income from bank deposits has become completely taxable. Thus, investors who saved taxes through these deposits would now have to look for other options.

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So , Whats The Option.?

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What Are Fixed Maturity Plans?

An FMP is a type of a mutual fund that invests in financial instruments whose maturity date coincides with a specific time period indicated in advance by the fund, and hence the name 'Fixed Maturity Plan. FMPs are actually close ended debt funds with fixed maturity offering an indicative yield.The keywords here is INDICATIVE. The instruments that constitute the assets of an FMP mature on the same date the plan is due for maturity. For example: An FMP of 1-year duration will invest in instruments that mature in one year.

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Features Of FMP :

Indicative Yield-On maturity there is a possibility of an actual returns deviating from indicative returns. Underlying Asset are the Debt & Money Market Instruments. Mitigation of interest rate risk, credit risk and liquidity risk. Double taxation benefits Fixed maturity date i.e. 15 days, 30, 90, 141, 180or even 365 days. Some even have a three or five-year time frame. Minimum Expenditure

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Players In The FMP Market

Since January 2005, almost 40 FMPs in different companies have been launched with many more lined up in the near future. Name of some companies are:

HDFC Mutual Fund Prudential ICICI Mutual Fund Kotak Mahindra Mutual Fund Birla Mutual Fund ING Vysya Mutual Fund, etc.

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FIXED MATURITY PLANS

Comparison Between FMPs & Fixed Deposits

FIXED DEPOSITS

Min. Amount is Rs5000 Min. Amount is Rs1000 Time Frame is 15 Days-5 Years Time Years is 6 Months-10 Years It is Managed by mutual funds. It is managed by banks FMPs are debt instruments managed Bank fixed deposits (FDs) are by mutual funds in typically Govt. deposits in bank debt instruments. backed securities, and corporate The bank fixed deposits have a fixed fixed deposits. FMPs typically offer an expected rate of return Not much risks are associated with rate of return. FMP consists of interest rate risk, it. credit risk & Liquidity Risks. Tax Payment Flexibility for Interest income is taxed as per the Investors. investors tax slab.

In summary, FMPs are better higher yielding investments for investors, but as they always say, watch out for the fine print.
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Tax Advantages In FMPs

FMP Bank FD Investment Amount (Rs.) Assumed Net Yield to investor (p.a) Tenor (Months) Amount at Maturity (Rs.) 1,00,000 7.50% 13 1,08,125.00 Without Indexation 1,00,000 7.50% 13 1,08,125.00 With Indexation 1,00,000 7.50% 13 1,08,125.00

Interest/Long Term Capital Gain

8,125.00

8,125.00

8,125.00

Indexed Cost of Acquisition

N.A.

N.A

1,10,250.00

Indexed Gain/ (Loss)

N.A.

8,125.00

(2,125.00)

Tax Rate ^

33.66%

11.22%

22.44%

Tax on Interest on FD/ Capital Gain on MF

2,734.88

911.63

Post Tax Income

5,390.13

7,213.38

8,125.00

Post Tax Rate(Simple Annualised) ^ Assumed to be in the highest tax

4.98%

6.66%

7.50%

bracket 13-month(1 year & 1 Month) FMP ,it mature in April 2011. Pass through two financial years launch in 2009-2010 and maturing in 2011-2012. 4/14/12 Cost Inflation Index for FY09-10 is 632. The assumption is that the

Plans & Options

Factors inducing a customer to invest in FMPs Through XYZ financial services

Ratio of debt/money market instruments & Govt. securities.

Liquidity

Redemption Proceeds time A penal interest

Transparency

NAV calculation at the close of every business day Disclose details of the portfolio of the scheme on a quaterly basis on its [AMC] website.

FlexibilityTax benefits ->Attract 12.96% Dividend Distribution Tax.

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Thank You

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