Fund houses raise FMP tenures to ease investors tax burden

Written by fe Bureau | Updated: Aug 13 2014, 07:17am hrs
Several fund houses have raised the tenure of their one-year FMPs to three years, a move that will allow investors to avoid paying short-term capital gains.

About 30 one-year FMP schemes have been rolled over or extended to 3-years in the last one month, according to data collated from Value Research. Overall, about 50% of the one-year FMP schemes due in July have been rolled over to three-year period, estimates show. Investors may choose not to roll over these schemes and withdraw their money instead.

In the August-September period, another R70,000- 80,000 crore worth of FMPs are coming up for redemption, of which about R20,000 to R30,000-crore FMPs are likely to get rolled over, say experts.

According to industry observers, the success of a rollover of an FMP scheme depends on the constitution of the scheme. If the scheme has more of institutional clients, only a small portion of the scheme would roll over. If, however, the participants constitute a mix of retail and institutional investors, a large portion could get rolled over, said Dwijendra Srivastava, head of fixed income, Sundaram MF. Overall, he believes, the success of the scheme's rollover in the next two months could vary anywhere between 10% and 50%.

Fund houses have to get investors' consent to to roll over their closed-ended schemes, as per Sebi norms. Investors who dont want to continue with the scheme can redeem their investments at the prevailing NAV. After the rollover, the scheme needs to have at least 25 investors with a total corpus of R20 crore to comply with Sebi's 20-25 rule.

The demand for one-year FMPs are likely to reduce going forward. There will definitely be a substantial reduction in demand for 1-year FMPs and many investors will move to the three-year segment. However, the true extent of the demand can only be gauged in the January-March period when maximum FMPs are launched, said R Sivakumar, head of fixed income, Axis MF. Experts believe that despite a reduction in demand, 1-year FMPs will continue to find takers as long as the FMP schemes offer at least 3-5 bps higher returns than the 1-year bank fixed deposits.

Long-term capital gains tax (LTCG) rate for debt mutual funds has been raised to 20% from the existing 10%, while the definition of longer duration has been increased to three years from one year FMPs are treated as a debt fund and short-term capital gains in a debt fund are taxed as per an individual's applicable slab rates. Long-term capital gains is now 20% with indexation.