Skip to main content

Post-tax returns seen more in FMPs due to double indexation

 

Investors looking to beat fixed deposits offered by banks are eager to park their money in Fixed Maturity Plans, or FMPs, to cash in on the spike in interest rates due to spiralling inflation and tight liquidity conditions. FMPs are close-ended debt schemes. These are passively managed funds with a low portfolio turnover resulting in lower transaction costs and enhanced returns. The industry AUM (asset under management) as on December 31, 2010, stood at Rs 6,51,708 crore, of which FMPs generated Rs 68,418 crore."Even though the yields have been heading higher, the upside seems limited from the current levels. Also, February and March are ideal months to lock in money in these products as investors also claim tax advantage. While a fixed deposit attracts tax as per an investor's tax slab (over 30% for last slab), a 13-month FMP only attracts a tax of about 20.6% (after adjusting for inflation, which is called indexation). In the case of FMPs, double indexation enhances post-tax returns. For instance, if one invests in a 370-day FMP on March 29, 2011, it will mature on April 2, 2012. However, for income tax purposes, the investment is done in FY 2010-11 and sold in FY 2012-13. Thus, investors reap the benefits of indexation for two years — 2011-12 and 2012-13 — and the tax outgo reduces accordingly. Compared to 1-year fixed deposits offering 9-9.5%, which post tax comes to around 6.5%, if an investor parks his money in a 15-month FMP with 100% bank CD portfolio, yields are expected to be better by at least 50 bps. While fund managers are not allowed to give indicative returns on fixed-term portfolios, the general consensus is that the posttax yield will be easily around 8.5-9%. FMPs are available in dividend and growth options, but for investments with less than 1-year tenure, it is advisable that an investor opts for the dividend option since income can be distributed as dividend on which 13.841% tax will be paid. The only counter-argument for not investing now could be to wait for a month or so for advance tax outflows of March and expect yield levels to move up further.


On the flip side, liquidity could be a problem and investors seeking premature redemption may have to sell at a discount to the net asset value or even bear losses on their principal amount.

 

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...

Term insurance

Term insurance may not be the most-marketed product by life cos, but it’s a must-have in today’s risk-prone lifestyle WHEN was the last time your insurance agent sold a term plan to you? It’s not a very popular policy among agents, as their commission in absolute terms is low because of the low-premium. Just as agents have their self interests in mind while selling, you need to make your own decision about your insurance needs, which are unique to your family. COST ADVANTAGE A term plan is pure protection. It is the cheapest type of life insurance policy. But what you see might not be what you get, most insurers have a range of health parameters for standard rates. If any of your health parameters — weight, blood pressure for instance fall outside this range, you will pay more. For some companies, the standard range is very narrow. EARLY BIRD GAINS A 30-year-old will pay 15% more premium than a 25-year-old. At 40, the premium is double of what is applicable for a 25-year old, points...

Stock Dividend Yields

During a bull run, it’s very easy to ignore stocks with high dividend yields. After all, what could be more enticing than a growth stock? But in times of crisis, these boring ones tend to be the most sought after. The reason being that not only do dividends provide a cushion when the market is in the doldrums but such stocks also tend to fall less. The lure of dividend yield stocks is not easy to ignore. These stocks offer capital appreciation as well as cash payments. But logically, any company that pays a substantial portion of its earnings in dividends is reinvesting less and, therefore, would grow at a slower pace. So the trade-off is between higher dividend yields for lower earnings growth. On the other hand, companies with high growth potential and volatile earnings tend to pay less by way of dividends, if at all. Such companies would rather reinvest their earnings to sustain their growth. The capital appreciation of growth stocks is obviously higher than in dividend yield ones. ...
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