Mutual fund houses are rushing to launch fixed maturity plans (FMPs) to take advantage of tight liquidity and high short-term rates.
About 34 different FMP schemes are currently open for subscription, of which 15 schemes have a tenure of one year and 11 have maturities exceeding a year, according to data available on the Value Research website. What?s more? About nine fund houses have filed with market regulator Sebi this month to launch FMPs.
One-year bank CDs are currently trading at 10.75-10.90% in the market. According to fixed income experts, investors should consider locking in investments at these high rates. ?High yields are one of the main attractions for investors right now,? said Killol Pandya, head, fixed income, Daiwa Asset Management.
Although the RBI is unlikely to slash key policy rates as aggressively as earlier expected, interest rates are expected to fall in the coming months. Also, the central bank has indicated that liquidity might improve in April which could bring yields down in the coming weeks.
According to market participants, FMPs with tenures of more than one year are launched in March to take advantage of double indexation benefits. ?Thirteen-month products are popular right now as they give double indexation benefits,? said Pandya.
Double indexation enables an investor to add the cost of inflation for two years to the purchase price of the units. Inflating the cost of acquisition can even help the investor show a ?notional loss?, which can be adjusted against any other taxable long-term capital gains.
FMPs are treated as a debt fund and incur long-term capital gains for schemes maturing after a year. The investor can choose between a 10% flat tax on returns and 20% tax after indexation for inflation. If the investor opts for a dividend option, then he has to pay a dividend distribution tax of 14.16%. For maturity period of less than a year, the gains are added to the investor?s income.
FMPs are close-ended mutual fund debt schemes with a fixed maturity date and invest in corporate debt, government securities and money market instruments. As the securities are held to maturity, the final returns are not impacted even if the underlying investments in these plans fluctuate.