Tag - Fixed Maturity Plans

December 2013

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

February 2013

Time to take double indexation benefit ~ From Now until March 2013

 

Double Indexation Benefit, Save Taxes, Invest in FMP's, Fixed Maturity Plans NFO'sIt is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.

The opportunity arises every year from mid-feb until financial year ending i.e March 31

You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .

With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). These funds are available from leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s

The estimated current yields on these FMP’s should be in the range of 9.5 %.

FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  Please note that the drawback of investing in FMP’s is illiquidity.

The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

November 2012

What are Fixed Maturity Plans (FMP’s) ~ Advantages & Disadvantages

.Fixed Maturity Plans (FMP's) ,Advantages , Disadvantages, Debt Mutual Funds, Indexation Benefits,

I Came across this note in Economic times about FMP’s and have reproduced it here. It gives a fair idea about FMP’s in general and the advantages/disadvantages of investing in them along with Indexation benefits. There are some obvious benefits of investing in FMP’s over FD’s in terms of post tax returns using the indexation benefits. Investing towards the end of March gives double indexation benefits as well.

A fixed maturity plan (FMP) is a closed-ended debt scheme, wherein the duration of debt papers is aligned with the tenure of the scheme. So a one-year FMP will invest in debt instruments that mature in one year or just before this period.

This synchronized maturing completely eliminates the interest rate or reinvestment risk.

The FMPs invest largely in certificates of deposit (CDs), commercial papers (CPs), money market instruments, corporate bonds, even in bank fixed deposits. Though the yield of these wholesale debt papers is slightly higher than that of the retail FD rates, FMPs charge fund management fees and, therefore, the final return for investors is more or less close to the retail FD rates.

Advantages

So why should one consider the FMPs?

While such plans offer several advantages, the tax benefits stand out. Irrespective of the holding period, FMPs generate better post-tax yield. The length of the holding period matters, especially when one has to decide between growth and dividend options. Investors can go for the growth option if the holding period is more than a year, and for the dividend option if the holding period is less than a year.

Mutual fund investors have the option of paying capital gains tax at 10.3% (without indexation) or at 20.6% (with indexation). Indexation helps offer compensation against the rising inflation and, in this case, one is allowed to increase the value of initial investment as per the cost inflation index provided by the Income Tax Department. On the assumption that the inflation is 6%, the capital gain after indexation works out to just 4%. Since the 20.6% capital gains tax is paid only on 4%, the effective is lesser, taking the post-tax yield up to 9.18%.

As per the current law, investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 375-day FMP, which starts on 26 March 2012 and matures on 5 April 2013. Since it is spread over three financial years-2011-12 (investing year), 2012-13 (holding year) and 2013-14 (redemption year)-the indexation will be for two years (6%+6%). In this case, one can report a 2% long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further. One can come across several FMPs with double indexation benefits in March.

Disadvantages

Though FMPs offer several advantages, investors should also be aware of the drawbacks. Unlike the bank FDs, where one can opt for premature withdrawal by paying a small penalty, the exit from a fixed maturity plan is very difficult. Though these units are listed on the stock exchanges, most counters are virtually illiquid. Even if random trade takes place, it is usually at a discount to the NAVs. So investors should put in only the money they don’t need till the maturity of FMPs.

Though the FMPs are relatively less risky, investors should not treat these as dream products that offer high return with zero risk. While the structure eliminates interest rate and reinvestment risk, the credit risk (or the default risk) still exists. Since the fund houses are not allowed to give ‘indicative portfolios’, there is no mechanism to make sure that the money will be invested only in high quality papers. While bank FDs come with deposit insurance (for a holding of up to Rs 1 lakh), a similar facility is not available for FMPs. So one should only opt for reputed fund houses. ~ Source ET

Read & become aware about Debt Funds & indexation Benefits.