Skip to main content

How to calculate indicative returns from FMP NFOs?

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

In a previous article we had discussed that, in the last one year top performing Mutual Fund Fixed Maturity Plans have given better returns than bank fixed deposits even on a pre tax basis. On a post tax basis, FMP returns are even better than FDs because while FDs are taxed at the applicable income tax slab rate of the tax payer, FMPs are subject to capital gains tax at 10.3% without indexation benefit and 20.6% with indexation benefit. However, bank fixed deposits are more popular than FMPs because while banks can tell investors how much interest they will pay, investors in FMPs have little clarity on how much returns they will generate.

In this article, we will discuss how investors can calculate estimated return from FMP new fund offer (NFO), so that they can compare the returns with the fixed deposits and other short term debt investments, before making an investment decision. SEBI now allows close-ended debt schemes to disclose instruments in which they propose to invest as well as floors and ceilings within 5 per cent range of the intended allocation. This information, available in the scheme information document or offer document of the new funds offering (NFO), can help investors get more clarity on the returns they can expect from the FMPs.

Fixed maturity plans are close ended schemes that aim to generate income for the investors in a fixed term, by investing in debt securities such as treasury bills (T-bills), commercial papers (CPs), certificates of deposit (CDs), government and corporate bonds. FMPs are open for subscription for a limited period. Investors cannot redeem FMP units before maturity. While investors can sell FMPs on stock exchanges, the liquidity of FMPs before maturity is quite low. As such investors should buy FMP units with a view of holding them till maturity.

Before we discuss how to calculate expected returns from FMPs, let us briefly review the different types of debt instruments that the FMPs invest in.

·         Government Securities (G-Secs): These are debt instruments issued by the RBI on behalf of Government of India. There are both short term and long term instruments. The short term instruments, also known as Treasury Bills, have maturities of 91, 182 and 364 days. The long terms G-Secs have maturities ranging from 1 to 30 years, and offer fixed interest rates. Government securities have zero credit risk

·         Corporate Bonds or Debentures: These are issued by private and public sector companies. These instruments carry credit risks and are rated by the rating agencies like CRISIL, ICRA etc. Higher the credit risk, higher is the interest paid by the bond issuer.

·         Certificate of Deposits (CDs): CDs are money market instruments, issued by banks and financial institutions for maturity periods ranging from 7 days to 3 years

·         Commercial Paper (CPs): CPs are also money market instruments, issued by corporate entities for maturity periods ranging from 7 days to 365 days.

While these instruments have various maturity periods, fund managers of FMPs try to match the maturities of their debt instruments with the maturity of the scheme, so that they can minimize re-investment risks. FMP offer document should clearly articulate the instruments (described above), in which the scheme plans to invest and in what proportion within a 5% range of intended allocation. The offer document should also mention the credit quality (e.g. A1, AAA, AA etc.) of the instrument and expected yields. It must be mentioned here that, the details provided in the offer document, differs from AMC to AMC, but most reputed AMCs provide enough details to enable the investors to calculate expected returns. In this article, we will how to calculate the expected yield of a FMP with a few examples using the information available in some upcoming NFO offer documents. Please note that the estimated are only indicative. The actual return will depend upon the actual allocation to the various instruments and the actual yields.

 

Example 1: Tata Fixed Maturity Plan Series 47 Scheme E

·         Fund Launch Date: 03/04/2014

·         Fund Closure Date: 09/04/2014

·         Maturity: 371 days

·         Indicative portfolio (see the offer document)

·         Expected Yields (see the offer document)

·         Calculation of expected returns

 

Example 2: Birla Sun Life Fixed Term Plan - Series LA (366 days)

·         Fund Launch Date: 04/04/2014

·         Fund Closure Date: 07/04/2014

·         Maturity: 366 days

·         Indicative portfolio (please see the offer document)

·         Expected Yields (see the offer document)

·         Calculation of expected returns

We need to make some assumptions here.

1 - Allocation: Since the largest allocation is to NCDs, let us assume the average of the range 95 – 100% which is 97.5% is allocated to NCDs. Let us the assume the balance 2.5% is equally allocated to CDs, CPs, G-Secs/ CBLO/ REPO/ Cash Management Bills/ Fixed Deposits and mutual funds, at 0.625% each.

2 - Since the offer document does not provide the AA bond / NCD yield, we have to make an intelligent estimation of the yield. Analysis of bond yields (available in business dailies and financial websites) will show that spread between yields of AA and AAA of same maturities, is 30 to 40 basis points (0.3 – 0.4%). In order to estimate the yield of 1 year AA rated corporate bond or NCD, we should add 0.4% to the yield of AAA rated corporate bond or NCD. Therefore, the yield of the AA rated corporate bond can be estimated to be 10.1 – 10.2%

3 - Since the offer document, does not provide CD yield, we have to make an estimation of the yield. Analysis of CP and CD yields (available in business dailies and financial websites) will show that spread between CD and CP yields (of same maturities) is 30 basis points (0.3%). Therefore the CD yield can be estimated to be 9.1 – 9.2%

4 - Since we do not know the exact nature of instruments included in the category G-Secs/ CBLO/ REPO/ Cash Management Bills/ Fixed Deposits and mutual funds, let us be conservative and assume the expected yield is the same as call money rate, 8.85 – 9.05%. It really does not make a big difference to the final yield of the FMP, because the allocation to these instruments is only about 1.2%.

Once we have made these assumptions, which are fairly straightforward, we can calculate the expected returns of the FMP.

Conclusion

In this article, we have discussed how to calculate with a certain level of confidence, the estimated returns from a Fixed Maturity using the information available in the offer document. We went through two examples, one (Tata) in which most of the information is available in offer document, and another (Birla Sunlife) in which the investor had to make some reasonable assumptions. Further, FMP investors should remember that FMPs are more tax efficient than other debt investments (please refer to our article, Top performing FMPs have given better returns than Bank FDs, for calculating capital gains with indexation). FMP investors need not go into their investments blind, or discard it straightaway because they do not have clarity of returns, compared to FDs which give assured returns. While the estimated returns are only indicative, it gives the investor a sense of how much returns can be expected from FMPs, especially compared to fixed deposit interest rates.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

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

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any 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. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. 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
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund

2.Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...
Read more

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...
Read more

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...
Read more

Banks tweak ATM strategies

Unrestricted usage of third-party ATMs ends on Thursday The era of free ATM usage will come to an end on Thursday, October 15. Every transaction carried out on another bank’s ATM could cost an account holder as much as Rs 20 and withdrawals will face a limit of Rs 10,000, the Indian Bank’s Association has said in its guidelines. According to the guidelines, banks can offer savings-account holders five free thirdparty withdrawals every month —they can be charged from the sixth transaction onwards. Current account holders can be charged the fees, which ranges from Rs 18 to Rs 20, from the very first transaction. Most banks are convinced that charging current account and no-frill account customers from the word go is a good idea. It suggests that the usage of ATMs by current-account holders is price-insensitive. For others, banks have decided to frame their charges depending on the profile of the customer. For instance, HDFC Bank is allowing its salary account and premium customers an unl...
Read more

Women need to plan for Retirement

Plan for Retirement Online       Higher life expectancy, lower pay and fewer work years necessitate thorough planning.   Women have raced ahead of men in various fields but, when it comes to retirement planning, they tend to lag behind. Despite saving a higher proportion of their salary, compared to men, women generally do not take retirement planning seriously. Below are some of the reasons why they should: According to the United Nations Department of Economic and Social Affairs, in India, the life expectancy of women is 69 years and, of men, it's 66 years. Due to this, a woman will need an additional `55 lakh to manage her living expenses (see table).Besides, usually, women work fewer years compared to men to take care of children and family.Further, a recent study by Korn Ferry Hay Group shows that women in India earn 18.8% less than men. Not to mention, a higher life expectancy can also mean higher medical expenses as the likelihood of health ailments such as diabetes, high...
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