Choose fixed maturity plans investing in high grade credit paper

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New Delhi | Published: May 28, 2019 1:10:52 AM

The realised return (yield) can be computed by plotting the cash flows against respective dates in an excel spreadsheet; and using the XIRR formula.

income tax, income, investmentSIPs are a mode of investment which enables the investor to average out the cost of his investments through disciplined purchases, particularly when the market is down.

I am stuck in a fixed maturity plan (FMP) as it has been rolled over for a year. How safe are FMPs? Should I invest only in bank deposits?

– Niraj Gupta

FMPs, like other debt funds invest in interest bearing securities (NCDs /CDs/ CPs), bear similar risks (illiquidity risk, credit risk) except for interest rate risk. FMPs are closed-ended products and can only be redeemed on maturity, unlike open ended debt funds which can redeemed anytime. FMPs are listed on exchanges wherein units can be traded among market participants, however liquidity is poor as not many participants engage in active trading.

On maturity post the rollover, you may consider reinvesting the proceeds in an open-ended short duration accrual fund offering a high credit quality or a bank deposit. Also, consider the tax implications since fixed income funds are taxed favourably at 20% plus cess with indexation if held for more than three years, unlike bank FDs which are taxed at the marginal tax rate. The broad credit profile of FMPs is mentioned in the respective SID available prior to launch. In the current scenario, one can consider FMPs investing in high grade credit papers (AAA /AA rated).

I have been continuing with equity Systematic investment Plan (SIP) for over two years and returns are very poor. Should I stop the SIP and resume when the markets move up?

—Deepak Kapoor

SIPs are a mode of investment which enables the investor to average out the cost of his investments through disciplined purchases, particularly when the market is down. If markets rally, the NAV increases and investor receives fewer units for each subsequent SIP instalment. The reverse happens when the market corrects; more units are obtained for the same amount. When you accumulate units when markets are correcting, you are receiving more units when the prices are down. Hence, you should continue SIP if you are investing for the long term as you would benefit from buying units cheap.

Since my SIP mutual fund statement shows only the total funds invested and the fund value every month, how will I calculate the growth per cent?

—Pramod Awasti

The realised return (yield) can be computed by plotting the cash flows against respective dates in an excel spreadsheet; and using the XIRR formula.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to
fepersonalfinance@expressindia.com

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