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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.

 

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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

 

 

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