Here’s Why Fixed Maturity Plans Are Gaining Popularity Over Fixed Deposits
As the interest rates are moving up, investors who are looking for fair returns via investment can lock-in their money for around three years and enjoy higher and also tax efficient returns by investing in fixed maturity plans of mutual funds.
Recently, the ten-year rates of mutual funds have inched up, this turned the interest of the mutual fund investors towards FMPs. This has further lead to lining up of FMPs by several asset management companies with tenure ranging from 1080 to 1405 days and returns of about 8.5%. With the implication of LTCG and factoring in the indexation benefit as well, the real return could turn out to be around 7.5 to 7.8 percent which is still higher than fixed deposits. Let’s learn more about them and see how is it a better option than fixed deposits.
FMPs Vis-a-Vis with FDs
Both being a debt instrument, FDs and FMPs have several similarities. The basic one is that both of them require investment for a fixed duration of time. Besides, they are available in varying maturities to suit your convenience level.
However, taking their returns into perspective, they both are a stark contrast to one another. Unlike the fixed returns that are delivered by fixed deposits, fixed maturity plans offer returns that are indicative. Therefore, it can be put this way that the returns stated by FMPs can be little higher or lower than the returns reported during the NFO. Since FMPs are held till the maturity date, investors cannot exit before it. As a result, with FMPs liquidity is an issue.
Who Should Invest in Such Plans?
As the value of an FMP plan is reflected by the fund’s Net Asset Value or NAV, the value changes almost daily. Thus, it is affected by the interest rate movements in the economy. This is where FMP becomes riskier than an FD.
Keeping this factor in mind, such plans are ideal for investors who need higher returns than regular FDs but can stomach little risk which is a result of frequent NAV fluctuations. Further, as the money is locked-in for three years, they are recommended to people who don’t require money till the tenure gets over.
Points to Ponder Before Opting FMP As Your Next Investment
- The returns generated by FMPs are probable returns, i.e., there can be a small change in the returns indicated during the buying phase.
- Such mutual fund investment plans are highly useful for investors that fall in the high-income tax brackets. They usually end up paying huge amounts as a tax on the interest earned on the FDs held by them. FMPs provide them the opportunity to earn similar returns at a much lower tax rate (due to indexation benefit in long-term capital gains).
- Look for the investment objective and yield and investment strategy of the scheme you are planning to invest in. Once you are in sync with these, invest an amount that you can leave locked-in and invested for three years and reap tax-efficient returns.
Going with the experts’ views, investors should ideally take the benefit of the current high-interest rate environment to invest money in FMPs for at least three years till rates start coming down. They are an ideal mutual fund investment for the post-retirement period, as one can earn higher risk-adjusted returns without having any interest rate risks. Also, due to the restricted liquidity, investors who would not need the funds for the tenure of the scheme should invest in these plans.
For more details concerning such funds, connect with our experts at MySIPonline.
- This Independence Day, Let's Pledge for Freedom from Financial Worries3876 min read Aug 14, 2018
- Are Balanced Funds Better Than Balanced Advantage Funds?2984 min read Aug 02, 2018
- 7 Points to Ponder While Investing in Small Cap Funds13943 min read Jul 19, 2018