return on debt funds move in opposite directions; that is, as bond yield rises, return falls and vice-versa.
Fixed maturity plans, being debt products, have negligible interest rate risk as the schemes invest broadly in assets maturing on or before the scheme maturity.
Moreover, fixed-income investments offer opportunities in both rising as well as declining interest rate regimes. Over time, debt as an asset class works well and builds up a strong portfolio. Despite the current volatility in debt, analysts say, the allocation towards it should not change much and the portfolio must be maintained as per the near-, medium- and lomg-term needs of an investor.
As per regulatory norms, MFs cannot provide assured returns. So, FMPs only indicate the likely returns that a scheme will give. Investors also have an option to pay tax on long-term capital gains at 10% without applying indexation, or 20% after applying indexation. One should consider investing in FMPs only if he is willing to take some risk for tax-efficient returns. Also, for risk-averse investors, investing in FMP makes more sense as post-tax, the returns are higher than bank deposits.
However, under Deposit Insurance and Credit Guarantee Corporation (DICGC), each depositor in a bank fixed deposit is insured up to a maximum of R1 lakh for both the principal and the interest amount held by him as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. All commercial banks, including branches of foreign banks functioning in India, local area banks and regional rural banks, are insured by the DICGC. Also, all state, central and primary cooperative banks, also called urban cooperative banks, are covered. Investors must note that for FMPs, there is no such guarantee on the capital in case the fund house suffers a loss on the investment.
Typically, AMCs launch FMPs in March with a 12-month lock-in period because of the benefits of double indexation for those who stay invested in these products for over a year. For example, a 13-month FMP launched in February 2013 will mature in March 2014