Looking for an investment avenue when the stock markets are choppy? A fixed maturity plan not only guards against the unforeseen but also gives good returns.
STOCK market opportunities may look like a mirage in a desert. In fact, what may look like a lifetime opportunity can turn into a black hole, and swallow your hard-earned money. But it shouldn’t deter you to make a foray on Dalal Street. A smart investor is one who holds his fort secure while keeping an open eye for better avenues. Fixed maturity plan (FMP) is one such investment that guards your portfolio against unforeseen risks and gives the good returns on your investments. Here’s a low down on what you need to know before taking an exposure in FMPs.
MATURE OUTLOOK
Financial planners say that FMPs, which have been offering high yields during the last couple of years, have become an important investment avenue. Though all segments of investors can benefit from them, this investment option is especially advantageous to those who earn above Rs 5 lakh and fall under the tax bracket of 30%. Another advantage with FMPs is that they can be used for park funds temporarily in volatile markets. It is typically invested in highly-rated debt instruments which mature in line with the maturity of the scheme. This effectively immunises the portfolio from any interest rate risk.
Beside this, the product structure is such that the investment horizon more or less matches with the portfolio maturity. In a nutshell, it helps you earn a decent risk-adjusted return along with a well-planned regular cash flow. Given its basic nature, asset allocation towards FMPs could be higher for investors who are risk-averse and are looking for predictable returns.
FIXED ADVANTAGE
An FMP is an effective guide to the indicative returns and hence helps plan the cash flow well in advance. Analysts hold view that the characteristics of an FMP is very similar to a fixed deposit. The tax treatment, however, is far more beneficial. FMPs are taxed under long-term capital gains, if investments are made for more than one year. Whereas in the case of a bank FD, you pay up to 30% plus surcharge subject to your individual income tax slab, FMPs actually increase your post-tax returns.
FMPs also attract lower dividend distribution tax at 14.1625% for retail and 22.66% for corporate investors (inclusive of surcharges). Further, if you manage to buy an FMP in March with a maturity of over two or more financial years, the tax liability becomes even lesser, making it more attractive.
Another advantage with FMPs is insulation from volatile interest rates. We generally think that it’s only stock market that is volatile but the truth is that interest rates are also volatile and FMPs manage this risk as well. You can also look at a plan, which has an equity component. It is one product which gives you the stability of fixed income with a small amount of equity participation and adds spice to your portfolio.
WATCH OUT
FMPs may be a good investment vehicle if you have a fair idea of your future cash requirements but you will have to sacrifice liquidity in turn. They generally invest in papers that mature in line with the tenure, to avoid re-investment risks. If you plan to redeem your investment prior to the maturity date, it attracts a high exit load, which reduces the effective yield.
Financial planners suggest that you should plan the cash flows in such a manner that you’re not forced to break the investment during the term. You should be clear about your investment horizon, which should be in sync with the duration of the FMP. This will help you get full benefits of higher post-tax returns.
You should analyse the track record of the AMC before taking any investment decisions. A look at the quality of the proposed portfolio before investing will also benefit.
Analysts believe that given the current attractive valuations in equity markets, such investments are likely to provide superior risk-adjusted returns. So, if you’re still saving money by opening fixed deposits, it’s time you start looking at FMPs. After all, they let you enjoy the triple benefit of predictable returns, minimal credit risk and most important, lower tax.
STOCK market opportunities may look like a mirage in a desert. In fact, what may look like a lifetime opportunity can turn into a black hole, and swallow your hard-earned money. But it shouldn’t deter you to make a foray on Dalal Street. A smart investor is one who holds his fort secure while keeping an open eye for better avenues. Fixed maturity plan (FMP) is one such investment that guards your portfolio against unforeseen risks and gives the good returns on your investments. Here’s a low down on what you need to know before taking an exposure in FMPs.
MATURE OUTLOOK
Financial planners say that FMPs, which have been offering high yields during the last couple of years, have become an important investment avenue. Though all segments of investors can benefit from them, this investment option is especially advantageous to those who earn above Rs 5 lakh and fall under the tax bracket of 30%. Another advantage with FMPs is that they can be used for park funds temporarily in volatile markets. It is typically invested in highly-rated debt instruments which mature in line with the maturity of the scheme. This effectively immunises the portfolio from any interest rate risk.
Beside this, the product structure is such that the investment horizon more or less matches with the portfolio maturity. In a nutshell, it helps you earn a decent risk-adjusted return along with a well-planned regular cash flow. Given its basic nature, asset allocation towards FMPs could be higher for investors who are risk-averse and are looking for predictable returns.
FIXED ADVANTAGE
An FMP is an effective guide to the indicative returns and hence helps plan the cash flow well in advance. Analysts hold view that the characteristics of an FMP is very similar to a fixed deposit. The tax treatment, however, is far more beneficial. FMPs are taxed under long-term capital gains, if investments are made for more than one year. Whereas in the case of a bank FD, you pay up to 30% plus surcharge subject to your individual income tax slab, FMPs actually increase your post-tax returns.
FMPs also attract lower dividend distribution tax at 14.1625% for retail and 22.66% for corporate investors (inclusive of surcharges). Further, if you manage to buy an FMP in March with a maturity of over two or more financial years, the tax liability becomes even lesser, making it more attractive.
Another advantage with FMPs is insulation from volatile interest rates. We generally think that it’s only stock market that is volatile but the truth is that interest rates are also volatile and FMPs manage this risk as well. You can also look at a plan, which has an equity component. It is one product which gives you the stability of fixed income with a small amount of equity participation and adds spice to your portfolio.
WATCH OUT
FMPs may be a good investment vehicle if you have a fair idea of your future cash requirements but you will have to sacrifice liquidity in turn. They generally invest in papers that mature in line with the tenure, to avoid re-investment risks. If you plan to redeem your investment prior to the maturity date, it attracts a high exit load, which reduces the effective yield.
Financial planners suggest that you should plan the cash flows in such a manner that you’re not forced to break the investment during the term. You should be clear about your investment horizon, which should be in sync with the duration of the FMP. This will help you get full benefits of higher post-tax returns.
You should analyse the track record of the AMC before taking any investment decisions. A look at the quality of the proposed portfolio before investing will also benefit.
Analysts believe that given the current attractive valuations in equity markets, such investments are likely to provide superior risk-adjusted returns. So, if you’re still saving money by opening fixed deposits, it’s time you start looking at FMPs. After all, they let you enjoy the triple benefit of predictable returns, minimal credit risk and most important, lower tax.
