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Fixed Maturity Plans (FMP) : Retail Research
Fixed Maturity Plans (FMP) : Retail Research
Fixed Maturity Plans (FMP) : Retail Research
RETAIL RESEARCH
FMP NFOs Current & Forthcoming
Scheme name
Tenure
Open Date
Close Date
Minimum Investments
370 Days
21Mar14
27Mar14
5000
742 Days
20Mar14
26Mar14
10000
376 Days
21Mar14
26Mar14
5000
371 Days
18Mar14
26Mar14
5000
376 Days
24Mar14
26Mar14
5000
373 Days
24Mar14
25Mar14
5000
377 Days
21Mar14
25Mar14
10000
378 Days
21Mar14
25Mar14
5000
372 Days
19Mar14
25Mar14
10000
369 Days
19Mar14
25Mar14
5000
378 Days
25Mar14
25Mar14
5000
373 Days
20Mar14
25Mar14
10000
377 Days
21Mar14
25Mar14
5000
12 Months
21Mar14
25Mar14
5000
745 Days
18Mar14
24Mar14
5000
366 Days
19Mar14
24Mar14
5000
367 Days
20Mar14
24Mar14
5000
367 Days
24Mar14
24Mar14
5000
380 Days
20Mar14
24Mar14
10000
366 Days
19Mar14
24Mar14
10000
373 Days
14Mar14
24Mar14
5000
386 Days
19Mar14
24Mar14
5000
12 Months
17Mar14
24Mar14
5000
378 Days
20Mar14
24Mar14
5000
1094 Days
19Mar14
24Mar14
5000
376 Days
21Mar14
24Mar14
5000
367 Days
24Mar14
24Mar14
5000
374 Days
21Mar14
24Mar14
5000
380 Days
18Mar14
21Mar14
5000
375 Days
21Mar14
21Mar14
5000
1094 Days
11Mar14
21Mar14
5000
367 Days
20Mar14
21Mar14
5000
21Mar14
24Mar14
5000
1108 Days
12Mar14
26Mar14
5000
3360 Days
14Mar14
25Mar14
5000
37 Months
20Mar14
24Mar14
5000
1127 Days
20Mar14
24Mar14
5000
1095 Days
14Mar14
24Mar14
5000
1832 Days
14Mar14
24Mar14
5000
1120 Days
14Mar14
24Mar14
5000
1831 Days
13Mar14
24Mar14
5000
Prologue: Fixed Maturity Plans are closeended debt schemes with a maturity horizon varying from one month to five years. They are launched with predetermined maturity
date; so as the investments are made in such securities which mature at or around the same time as the schemes do. Investors are not allowed for premature redemption
during period and are warranted to stay till maturity. However, premature withdrawals are allowed on the stock exchanges where these units are listed and traded at market
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prices. However this route is not yet very liquid. The schemes are shut down generally once they get matured. In a rising interest rate scenario, FMPs are seen as best
investment tools. They are better investment options than bank fixed deposits (FD) as they offer higher after tax returns with minimal extra risk.
Structure: The objective of FMPs is to generate steady returns over a fixed period and safeguarding the investor against market fluctuations. They invest in Government
securities, corporate debts and money market instruments. They invest in those instruments that get matured at or around the same time as their schemes. Given the
structure, it is implied that the returns are always in positive terrain if held till maturity. Even though the schemes are listed & traded in stock exchanges, liquidity is currently
limited as their prices trade at a huge discount to their NAVs. It is best suited for the investors who are comfortable locking in their investment until maturity. FMPs NFOs are
generally opened for one to three days and minimum investment amount is set at Rs. 5,000. The difference in returns that are yielded by two different FMPs, having same
tenure, arises out of the risk taken on in the portfolio by the fund managers. The one which invests in higher rated debt instruments would yield lesser return compared to
another with lower rated (risky) debt instruments. Industry regulators have taken ample measures to promote such products as an efficient investment tool and to protect
the investors from any misleading. It is noteworthy to say that the SEBI strictly instructed all the fund houses to stop selling fixed maturity plans on the basis of indicative
returns as such practice is unethical and boils down to guaranteeing returns. SEBI has also stopped fund houses from giving an exit option. Earlier, an investor had the option
to redeem FMP units to the mutual fund house before maturity by paying an exit load of 2% of the net asset value.
Tax Treatment: FMPs are taxefficient. They are subject to capital gains tax and dividend distribution tax. The tax treatment depends on the choosing of investment options
such as growth or dividend. In Dividend option, investors have to bear dividend distribution tax, whereas in the Growth option returns earned are treated as capital gains
(shortterm or longterm depending on tenure of investment). Dividend option is best suited for investors who fall under higher tax bracket (if the investment horizon is less
than a year). Though the dividend received is tax free in the hands of investors, a Dividend Distribution Tax (DDT) of 28.325% is levied by the mutual funds and deducted
from investors proceeds before pay out. As far as effective tax rate on DDT is concerned, the effective rates are lower for investors as the DDT is calculated on actual dividend
distributed and not on gross returns. But for an investor, the tax rate is calculated from the gross returns of his investment. Actually, the AMC has to pay 28.33% on the
dividend of retail investors which is the same as 22.07% tax on the gross returns of the investment of the investors.
An investor in an FMP with tenure of over a year who opts growth option to take gains as capital appreciation will attract a tax rate of 10% or 20% (depending on whether or
not indexation is applicable). As against this, interest on banks Fixed Deposit of similar tenure might be taxed at 30%. In case of shortterm capital tax, it is similar to interest
income from bank fixed deposits. The returns are added to the income of the investor and taxed as per his/her slab. FMPs of longerterm maturities spanning over more than
two financial years also offer better tax efficiency through double indexation benefits. For instance, if you buy an FMP of 14 months in February 2010, scheme will mature in
April, 2011. In this case, the investor will get inflation indexation benefits for the years 200910 and 201112.
Indexation benefit: Inflation erodes the real value of any investment. So every year, an inflation index based on the prevailing rate of inflation is announced. The cost of
investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing in the year of investment. If you have arrived at an indexed
cost, then the longterm capital gain is taxed at 20.6% and if you do not opt for the indexed cost, then the tax is 10.3% of the gains. As per the current law, investors can claim
double indexation benefit if the holding period is over three financial years. Consider the case of a 375day FMP, which starts on 30 March 2012 and matures on 9 April
2013. Since it is spread over three financial years201112 (investing year), 201213 (holding year) and 201314 (redemption year)the indexation will be for two years. In this
case, one can report a longterm capital loss (instead of gain) and it can be set off against other longterm capital gains reducing the tax liability further. One can come across
several FMPs with double indexation benefits in March every year. However, investors can claim (single) indexation benefit if the holding period is over two financial years
(for the investment period of minimum one year).
Conclusion: FMPs are taxefficient and yielding favorable returns. However, they offer no guaranteed returns (unlike fixed deposits) and ample liquidity. Given the present
credit market tightness, fund houses launch more FMPs. Investing in short term FMPs is advisable at this point of time. They can be an excellent investment for investors who
clearly understand the risks associated with them.
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for
circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources
believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to
time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for nonInstitutional Clients.
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