What kind of fixed maturity plans (FMPs) should I look at for short-term investments and what are the tax implications?

? Ashutosh Sapru

To meet short-term investment needs, AMCs offer FMPs with maturities ranging from as little as 15 days to 365 days. However, one should not invest his emergency funds in these schemes as they provide very low exit opportunity. One only has the option to sell the fund through a stock exchange, where again, it is highly unlikely that you will find buyers. FMPs get the same tax treatment as debt mutual funds. Thus, investment in FMPs with more than a year?s duration provide indexation benefit. Individuals in the highest income tax bracket can get better after-tax returns from FMPs compared to fixed deposits, which do not provide such benefits. FMPs also give a double-indexation benefit, i.e., if you plan your investment in such a way that you stay invested for two financial years, you get to enjoy double-indexation benefit. FMPs maturing before one year would be taxable as per your income-tax bracket.

How do I calculate indexation benefits over a period of 2-3 years?

? Pankaj Sharma

Indexation benefit is a great incentive provided to debt MF investors. It can make post-tax returns of debt funds far superior to FDs. Long-term capital gains (held over a year) on debt funds suffer a 10% tax without indexation or 20% with indexation benefit.

In the latter case, by indexing, you can bring your cost of investment to the current value, after factoring in the general price rise for consumers. For availing indexation benefit over a period of 2-3 years, you need to calculate your long term capital gain on the investment; then, you need to index the inflation cost to your principal investment. The difference between the long-term capital gain and the inflation-adjusted amount would be subject to 20% tax. Given that the capital gains index has been expanding at a good pace, courtesy inflation, using the index will likely ensure that you pay very little tax on your gains.

For an SIP of debt products, what should I look at before deciding on a particular scheme?

? Somen Ghosh

Systematic investment plans (SIP) are the best way to build wealth over the long term. It is an effective alternative mode of payment compared to a one-time investment. Be it the SIP mode or a one-time investment, the method to select a debt fund would remain the same. Selection of debt fund requires examination of certain parameters like scrutinising the quality of underlying papers ? high quality debt papers are preferable; checking modified duration ? high duration funds are subject to high interest rate risk; period for which you want to stay invested ? maturity profile for each category is different; past performance of the fund; and expense ratio ? critical for debt funds as returns are low.

How do I select a balanced fund and can I look at an investment horizon of more than five years?

? Brijmohan Singh

Investing in balanced fund provides a readymade solution to the need for a well-diversified portfolio. Depending on your risk profile, individuals with medium-to-high risk appetite can consider investing in equity-oriented balanced funds, usually placing about 65-70% of their assets in equity, while individuals with low risk appetite can consider investing in debt-oriented balanced funds (also known as monthly income plans). There are a host of parameters to be looked at before selecting the right balanced fund. You should examine the fund?s risk-return ratios over a long tenure, portfolio-based parameters, fund house?s stewardship and fund manager?s quality. There are a host of independent MF rating companies giving out ratings on these balanced funds. Prospective investor should take help of these ratings to select the right fund. One should always invest in these funds with a long-term perspective.

Sameer Hassija

The writer is senior investment analyst, Morningstar India

Send your queries at fepersonalfinance@expressindia.com