Skip to main content

With tax advantage FMPs are better than Bank FDs



Indian investors, conventionally, prefer to invest in debt products that guarantee both principal and returns. Inflation-led high interest rates have added to the allure of debt investments. Though a majority of savings flow into bank fixed deposits (FDs), there is a growing awareness about debt mutual funds, specifically fixed maturity plans (FMPs), owing to inherent features like low interest rate risks, tax arbitrage opportunities and regular portfolio disclosures.


Further, FMPs benefit in a high interest rate regime as they lock into portfolios offering higher yields. The key benefits of lower tax rates and double indexation benefits help FMPs score over FDs:

 

1.       Lower tax rates:

 

While interest from bank FDs is subject to tax at the investor's marginal rate of tax (10% to 30%, plus 3% cess), returns from FMPs are subject to tax based on the options thus selected:

 

a) Dividend option: Dividend Distribution Tax (DDT) at 12.5% plus 5% surcharge and 3% cess (total 13.519%) is deducted at source.

b) Growth option: Long term capital gains (LTCG) tax if units are held for more than one year and short-term capital gains tax otherwise. The latter is taxed at the investor's marginal rate of tax. In case of LTCG, the tax rate is 10.3% (without indexation benefits) or 20.6% (with indexation benefits) whichever is lower. Indexation allows investors to be taxed only if they generate returns over and above inflation by adjusting the purchase price for inflation.
The dividend option is more appropriate for FMPs with tenure of less than a year as it results in lower tax incidence compared to the growth option.


For a greater than one-year period, the growth option is more suitable.


2. Double indexation benefits:


This comes into play when an FMP is purchased in one financial year and the maturity of the scheme is in the third financial year, as the inflation rate of two financial years can be used (called double indexation).


Thus, 14-month FMPs are very popular in March. If a 14-month FMP is launched in March 2011 (FY2010-11), it will mature in April 2012 (FY2012-13). Double indexation effectively reduces one's tax liability, especially during the period of high inflation (see Benefit from double indexation).


One of the biggest advantages of fixed deposits is that, along with guaranteed returns, they come with a deposit guarantee of Rs 1 lakh in case the bank defaults.


However, FMPs offer no such guarantee and also carry a credit risk (possibility of default of securities in their portfolio). Investors must, therefore, monitor FMP portfolios that are available on the websites of mutual funds for their credit rating.


Further, FDs are relatively more liquid as premature redemption is allowed, albeit at a cost. FMPs have low liquidity despite the listing as trading volumes are very low. Investors should opt for FMPs only if they do not need premature redemption and benefit from high post-tax yields.


What are FMPs?


FMPs are closed-ended mutual fund schemes with a pre-defined maturity. They invest in debt instruments — predominantly certificates of deposit (CDs) and commercial papers (CPs). The most commonly offered tenures are 30, 180, 370 and 395 days. FMPs invest in a portfolio of debt securities whose maturity or tenure matches that of the scheme. If the FMP is for 12 months, the fund manager will invest in instruments with a maturity of 12 months, thus locking the yield of the portfolio and lowering the interest rate risk. For liquidity purposes, FMPs are listed on stock exchanges, though trading is very minimal.

 

Happy Investing!!

 

We can help. Call 0 94 8300 8300 (India)

 

Leave your comment with mail ID and we will answer them

                                                OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds        Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds     Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds    Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds             Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds              Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Gold Mutual Funds             Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...
Read more

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...
Read more

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...
Read more

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Read more

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now