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What should you do with FMPs?

 

What should you do with FMPs?

When an important investment instrument suddenly becomes unattractive, investors wonder whether they should put money in these at all. After the presentation of Union Budget 2014- 15, many are thinking on the same lines about Fixed Maturity Plans (FMPs).

 

A particular change in taxation norms--- now, an investor in a debt fund redeeming between one and three years will have to pay tax according to her/ his income tax bracket--- has stumped many. Earlier, if one remained invested in an FMP for slightly more than a year, she/ he could get inflation indexation benefits of two years. Under the new norms, the double inflation benefit will only be applicable if one is invested for at least three years.

Fund houses have been asking investors to roll over their money in these schemes. If you have already stayed invested in an FMP for 15- 18 months, it makes sense to stay invested for the remaining tenure because the tax blow will be reduced substantially.

The important question, therefore, is whether or not FMPs should be a part of your portfolio. Ideally, investors with a three- year horizon should have FMPs in their portfolio because the indexation benefits still exist and helps them record better returns than fixed deposits.

For investors seeking the comfort of an exit before the scheme matures, FMPs will now be a concern. As these schemes are close- ended, the only way to exit before the tenure ends is through the stock exchange route. And, as these units have little or no liquidity on stock exchanges, one might be forced to sell at a discount. Also, there will be an additional tax element on capital gains.

By comparison, fixed deposits score. This is because if you want to exit a fixed deposit, the bank will charge you only a nominal fee.

There are a number of aspects one needs to consider--- asset allocation, tenure, risk profile, etc. Though liquidity is an issue, one advantage FMPs will continue to have over fixed deposits is the rate of returns. Typically, FMPs offer 50- 100 basis points over and above fixed deposits. So, even if there is an equal grounding in terms of taxation, the returns are better. By comparison, FMPs are less secure because there is no assurance on the returns front.

For investors, it's a toss- up between slightly better returns

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