All you wanted to know about fixed maturity plans

Banks have been luring investors by offering attractive deposit rates, but FMPs, with tax-adjusted returns, still score higher. Fixed Income instruments seem to be stealing the show these days. Currently 90 day Bank FD offers 5.50-5.75% whereas FMPs of 90 days are offering 6.85-7.10%.

The tax implication is same here as the interest earned on Bank FDs and the appreciation earned in FMPs has to be added to the income of that year and tax is to be paid as per your tax slab.

The attraction increases when the term selected by you is over 365 days. Let's consider a bank FD offering 8.00% and an FMP offering 8.00%. In a bank FD you have to pay 30% tax (if you are in the highest tax bracket). So your post tax return is 8.00% minus 30% tax on it, which leaves you with a paltry 5.60% post tax returns.

Whereas, in FMPs you need to pay just 10% concessional Long Term Capital Gain Tax without indexation or 20% with indexation for investments of over a year. So your post tax return is 8.00% minus 10% tax on it, which leaves you with a smart 7.20% post tax returns. (Add 2% education cess & 10% surcharge if applicable on tax paid in both cases). In institutional plans, corporates earn additional 0.25% -- 0.40% pa returns.

The attraction increases further if the term is higher than, say, 2 years.

Though banks are offering 8.00% for 366-390 day deposits, the rate of interest is lower on higher terms. Banks are offering 7.50% (8.00% for Senior Citizens) for terms over 2 years and attract the usual 30% tax (for highest tax bracket individuals) whereas FMPs offer 8-8.10% returns.

So, get smart to earn higher returns and pay very less tax!

Do they (FMPs) have divided option? And what's the tax implication on it?

Yes. In most cases half-yearly dividend option (payout / re-investment) is available. Dividends are tax-free in the hands of the investors.

Dividends of mutual funds attract only a dividend distribution tax of 12.5% (add 2% EC and 10% SC) resulting in 14.025% for individual investors vis-à-vis interest on deposits and corporate bonds, which is charged at a marginal income tax rate, mutual funds give better post-tax returns.

Are FMP returns assured?

FMPs produce predictable returns over the desired timeframe since the maturity of the portfolio matches the tenure of fund schemes. Unlike other schemes that suffer from volatility and, hence, risk of erosion in asset value, an FMP -- structured as closed-end funds -- carries no interest rate risk. Whether yields rise or fall, the asset value of these schemes is protected as deposits / bonds are held to maturity.

Availability & Loads?

FMPs, being close-ended, are available for investment only during their initial offering. They are available at the face value of Rs 10 per unit. These schemes don't levy any entry load. Minimum investment normally is just Rs 5000/-

Is premature withdrawal allowed?

Yes. Exit Load will be levied on prevailing NAV.

Do NAVs move sharply?

No. This is a debt product. Debt product NAVs move up / down as per the movement of interest rates and changes in credit ratings of the underlying securities, and it also might go up if it's favourable during the term of the scheme. And if you stay till maturity of 90 days / 366 days / 24 months etc as per the scheme term, you need not even look at its everyday NAV. Just treat it like a fixed deposit.

Do some FMPs have equity component?

It will be mentioned clearly if they are going to invest some part in equity. Normally, short duration FMPs don't invest in equities at all. When the term is 3-5 years, some FMPs may have exposure to equity, which will be clearly mentioned.

How to select between Bank Fixed deposits & FMPs?

Calculate Post-Tax Returns -- That's where you win or lose.

FMPs are surely the smarter option than Bank FDs. . .

But is there something smarter in Debt for some specific needs?

Situation A: You have to park your funds for short duration, but you are not sure whether you would need it back in a month or 6 months.

Problem: In Bank FDs. if you make 15 days FD and renew every 15 days, you will lose on the interest rate. If you make a 6 month bank FD and if you have to prematurely withdraw it, you pay 0.50% penalty on the applicable interest rate for that period of deposit.

In FMPs, if you have to prematurely withdraw it, you pay an exit load.

Solution: In such scenario, where you may need your funds back at short notice, Liquid funds should be preferred over bank FDs & FMPs. Liquid funds have no specific term and can be withdrawn anytime. They generate around 5.00% p.a. returns.

Opt for dividend option (monthly) so that your returns are taxfree (though 14.025% DDT is applicable) rather than paying short term capital gains tax for any period less than 1 year.

Situation B: Want to invest, but No FMPs are available. Then what is a better returns option vis-à-vis bank FD. (Also read - The Investors biggest Dilemma)

Solution: Check out if any 'AAA' rated company FDs are offering better rates than bank FDs. Currently 'ICICI Home Finance Co. Ltd' (Care AAA) is offering 8.50% p.a. for 37 months and for senior citizens its 9.00%. Check out for similar options.

Should Bank FDs be preferred for 80C investment?

Banks are offering 8.00% (compounded yearly) for 5 years lock-in FDs U/S. 80C. They cant be withdrawn prematurely. No loans are available on it.

NSC seems to be a comparable option with 8.00% for 6 years (compounded half-yearly -- yield 8.16%). Loans are available against NSCs. Also the accrued interest is eligible for 80C deduction.

Also, since the term is 5 years, which can be considered as a fairly medium-long term, ELSS & ULIPs should be considered for higher potential returns as per individuals risk appetite. Also consider PPF @ 8% taxfree if just the safety is to be considered for a very long term period and if you are ready to forego higher potential returns and liquidity.

The author is Director, BrainPoint Investment Centre. For all your investment queries / requirements he can be reached at jaydeep@brainpointinv.com

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