As the current fiscal comes to an end, many fund houses are launching one year plus fixed maturity plans (FMP). Recently, Taurus Mutual Fund, Deutsche Asset Management and Religare Mutual Fund launched FMPs to target investors, lured by higher interest rate regime in the economy and advantages of pocketing double indexation tax benefits.
?Every year, during this time of year, number of one year plus FMPs hit the market, as it covers two financial years? Waqar Naqvi, CEO of Taurus Mutual Fund says. ?If investors invest in these FMPs, they virtually pay zero tax due to double indexation tax benefits.?
Double indexation comes in when the purchase is made in one financial year and the mutual fund scheme matures or is sold two financial years later. Suppose a 13-month FMP is launched in March 2009-10, it will mature a little after April 1, 2011. Thus, investment is made is in financial year 2009-10 while it matures in the financial year 2011-12. Indexation (for tax purposes) allows the returns generated on the debt portfolio to be adjusted for inflation so that investor pays tax only on the real returns.
By investing in one year plus FMPs in March, the investment and sale years are spread over two financial years. Thus an investor gets to adjust his returns against the inflation of two years, effectively reducing the tax liability to zero. With higher inflation scenario FMPs are a rage. FMPs are passive managed close-ended schemes investing in debt instruments of various durations.
Avnish Jain, head-fixed income, Deutsche Asset Management (India) and fund manager of DWS fixed term fund series 67 – a 398 days close-ended debt fund says, ?FMPs are ideal for investors looking at a relatively stable return over the medium-term. This product is a relatively low risk and stable investment option, coupled with better post tax yields.?
Reliance Mutual Fund has also filed an offer document with market regulator Sebi for their series Reliance Fixed Horizon Fund-XV.