Skip to main content

FMP - Higher yield at lower risk

 

   Shiva is a conservative investor. He trusts debt instruments and is reluctant to test the equity waters. Gauging the phenomenal returns on equity investments, he is keen to explore other instruments yielding a tad higher returns than traditional debt ones. Is there a better investment opportunity for a risk-averse investor like him? Will Shiva benefit by adding a fixed maturity plan (FMP) to his portfolio?


   FMPs are close-ended mutual fund debt schemes that have a predetermined maturity date. They invest in government securities, corporate debt and money market instruments, and aim at generating steady returns over a fixed period. They protect investors against market fluctuations. You cannot get premature redemption during the investment period and need to stay invested till maturity. FMPs are exchange-listed and the units can be sold on the exchanges.


   The objective of a FMP is to provide protection of capital. The returns are marginally higher than from pure debt investments. Fund houses have come out with innovative FMPs such as equity-linked ones. This is a debt fund that intends to invest primarily in bonds issued by corporates, banks and non-banking financial institutions. You have the option of selecting schemes that suit your risk appetite.


   FMPs do not guarantee any rate of return unlike products such as bank fixed deposits. On the basis of the investment tenure, FMPs are invested in a range of debt products of similar maturity dates. Based on the underlying instruments, an indicative rate of return is computed.


   Some fund houses have launched FMPs in which 65-80 percent is debt and 20-35 percent is equity. The returns from these products are more enticing for small investors.


   FMPs are tax-efficient, but subject to capital gains tax and dividend distribution tax. The dividend is tax-free in the hands of the investor. In case of an investment in the growth option of a FMP, held for less than a year, the gains are added to your income and taxed at your applicable income tax slab rate. If the FMP is held for more than a year, long-term capital gains tax is applicable. You have the option of choosing either capital gains tax with indexation or without indexation. It is 10 percent capital gains tax without indexation or 20 percent with indexation.


A few points to ponder over while investing in a FMP:

• FMPs are exposed to certain liquidity risk as the product is designed to be held till maturity. Investors must stick to the FMP till maturity and must not contemplate withdrawing prematurely.

• There is a credit risk associated with these instruments. There is a probability that the debt issuing company may not repay the principal. Credit rating agencies rate debt instruments on the basis of the financial health of companies floating them. A rating of 'AAA' indicates a very low risk.

• The fluctuations in NAV, if any, are not a cause for concern for both the fund manager and the investor. This is because the investor stays invested in the FMP till maturity. Temporary volatility in the FMP's NAV in the intermittent period will not dent the investor's pocket.

• There is minimal churning and portfolio review carried out by the fund manager because the underlying assets are held till maturity. Hence, FMPs are tagged with low expense ratio.

• The yield of a FMP is indicative unlike a fixed deposit, and is dependant on yields of assets that make it up.

• When choosing a FMP, study its indicative portfolio. FMPs are designed for investors like Shiva who seek competitive returns at low risk. If the fund manager has built a portfolio with debt instruments rated less than 'AAA', it carries certain degree of credit risk. Conservative investors must evaluate if they can digest the quantum of risk the portfolio carries.

 

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

 

Also, know how to buy mutual funds online:

 

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

 

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

 

3) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

 

4) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

  

5) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

 

6) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

 

7) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

 

 

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.
Read more

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli
Read more

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis
Read more

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
Read more

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
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