THE LAST few months have seen tumultous movement in the stock exchanges forcing eager investors to play it safe. With interest rates from banks slipping, investors are prone to look at alternatives. In recent times, especially over the last few days, some banks have also taken the decision to hike interest rates with some offering as much as 9% for a one-year fixed deposit (FD). This move (of hiking interest rate) has happened due to a 0.25% hike in repo rate by the RBI (the repo rate is the rate at which banks borrow from the RBI).
So is investing in a one-year bank FD the best way to earn some secure return? Not necessarily, aver investment experts. The product which many investors, be it high-networth individuals (HNIs) or retail investors could look at is the fixed maturity plan (FMP). FMPs are offered by mutual funds.
“FMPs have come of age during the last fiscal. It has moved from a product being sold to corporate with even HNIs jumping into the bandwagon,” says the regional head of a leading mutual fund. One of the reasons why there is growing interest in FMP is the fact that it is linked to higher returns.
Picture this. While a bank gives you around 9% interest on a one-year FD, the net return is around 7 % (after accounting for tax deduction of 30%, assuming the investor is in the highest tax bracket. A word of caution — we have for illustration purposes not assumed any surcharge on income tax) but a one-year FMP can fetch you a return of 9 - 11%. Even in FMP opt for the dividend option where the dividend distribution tax (which is paid by the mutual fund) is 14.3%. The other option growth can pull the return on FMP below the 8.8%-9% levels.
The FMP wins hands down giving you at least 2.5%- 2.8% higher return compared to a one-year bank FD. Mutual funds are willing to take small-size FMPs (these start at Rs 5,000). From a tax perspective, the one-year FMP is ideal, that investors who are willing to wait for a longer period can typically invest in a 13-month FMP, which also gives you the benefit of indexation. As the FMP is a debt-instrument the investor has to pay long-term capital gains tax (LTCG). However, thanks to indexation, the quantum of LTCG can come down significantly.
However, there could still be a catch, as most mutual funds don’t aggressively advertise the launch of FMPs. It would be convenient if one invests through a financial advisor as most distributors (advisors) have information of FMPs.
BANK RATES ARE UNATTRACTIVE; FMPS OFFER BETTER RETURNS; OPT FOR DIVIDEND OPTION
So is investing in a one-year bank FD the best way to earn some secure return? Not necessarily, aver investment experts. The product which many investors, be it high-networth individuals (HNIs) or retail investors could look at is the fixed maturity plan (FMP). FMPs are offered by mutual funds.
“FMPs have come of age during the last fiscal. It has moved from a product being sold to corporate with even HNIs jumping into the bandwagon,” says the regional head of a leading mutual fund. One of the reasons why there is growing interest in FMP is the fact that it is linked to higher returns.
Picture this. While a bank gives you around 9% interest on a one-year FD, the net return is around 7 % (after accounting for tax deduction of 30%, assuming the investor is in the highest tax bracket. A word of caution — we have for illustration purposes not assumed any surcharge on income tax) but a one-year FMP can fetch you a return of 9 - 11%. Even in FMP opt for the dividend option where the dividend distribution tax (which is paid by the mutual fund) is 14.3%. The other option growth can pull the return on FMP below the 8.8%-9% levels.
The FMP wins hands down giving you at least 2.5%- 2.8% higher return compared to a one-year bank FD. Mutual funds are willing to take small-size FMPs (these start at Rs 5,000). From a tax perspective, the one-year FMP is ideal, that investors who are willing to wait for a longer period can typically invest in a 13-month FMP, which also gives you the benefit of indexation. As the FMP is a debt-instrument the investor has to pay long-term capital gains tax (LTCG). However, thanks to indexation, the quantum of LTCG can come down significantly.
However, there could still be a catch, as most mutual funds don’t aggressively advertise the launch of FMPs. It would be convenient if one invests through a financial advisor as most distributors (advisors) have information of FMPs.
BANK RATES ARE UNATTRACTIVE; FMPS OFFER BETTER RETURNS; OPT FOR DIVIDEND OPTION
