FMPs will still offer a slightly higher return than fix deposits: Arvind Sethi

Jul 25 2014, 11:53 IST
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SummaryThe Budget doubled the tax on debt funds and raised the holding period from one to three for getting long-term capital...

The Budget doubled the tax on debt funds and raised the holding period from one to three for getting long-term capital gains benefits. As a result, post-tax return on fixed-maturity plans (FMPs) for more than one year, but less than three years, will be less attractive to those in a higher tax bracket. Arvind Sethi, managing director and CEO of Tata Asset Management, in an interview to Saikat Neogi, says, FMPs will offer a slightly higher return than fixed deposits and investors must go in for FMPs with a maturity of more than three years.

If the Budget tax proposals on non-equity funds are finally notified without any changes, how should retail investors look at FMPs?

If the tax proposals are notified without any changes, then the post-tax return on FMPs for more than one year, but less than three years, will obviously be less attractive to those in the higher tax bracket — but we still think that FMPs will offer a slightly higher return than fixed deposits. However, since FMPs are closed-ended, they will not be as liquid as bank deposits, and investors will have to weigh the liquidity versus return factor. The other option is to go in for FMPs with a maturity of more than three years and this may suit many investors for the core portion of their debt portfolio.

How will fund houses position FMPs vis-a-vis bank deposits of one or two years given that there won’t be any tax arbitrage between the two products? At your AMC, are you junking one- or two-year FMPs or deferring them?

The return on 1-2 year FMPs will probably still be higher than bank deposits and we will gauge the demand from investors before taking any decision. However, unless investor demand changes dramatically in response to the tax change, it is expected that the FMPs in the 1-2-year bucket will decline.

Are you approaching Sebi for permission to convert FMPs into open-ended debt MFs on maturity, as this may allow investors to extend their holding period beyond 36 months and the returns can be treated as long-term capital gains?

For a closed-ended FMP to be converted into an open-ended debt is a little more difficult, but we will be considering the option of extending the maturity period of existing FMPs to beyond three years, to give investors the option of either exiting at the original maturity or staying invested for more than three

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