Fixed Maturity Plans (FMP) are debt schemes held by mutual funds. These are close-ended funds which run for a fixed period of time. The tenure has a wide range which starts from a month and goes beyond three years of time horizon.
The main objective of FMPs is to generate high returns as compared to bank FDs which only invest in debt securities, while FMPs invest in fixed income securities like money market instruments, government securities, corporate bonds, commercial papers, certificate of deposits and bank fixed deposits, etc.
FMPs are better than bank FDs because they may offer you relatively higher yields & a better post-tax return based on current tax laws, and the prevailing macro-economic environment.
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Who should invest in FMPs?
FMPs are suitable for investors who want safe investment avenues and are in the process to keep their money in fixed deposits (FDs) of a bank. FMPs can be a better option as they can provide you tax-efficient returns based on tax laws amendments.
Also, investors who have a financial goal specified for a fixed time interval and therefore want to invest money in relatively safe instruments giving decent returns can invest their money in FMPs. Even investors who prefer to invest in equities should invest a part of their funds in FMPs in order to have a proper asset allocation as FMPs offer stability to the investment portfolio.
FMPs offer tax-efficient returns to the investor
FMPs being debt products offered by mutual funds enjoy different, favourable tax treatments as compared to bank FDs based on current tax laws. In FMP, one can enjoy the indexation benefit when investments are done for more than 3 years.
However, in the case of a bank FD, there is an assurance of returns, but the returns which an investor gets in the form of interest are liable to be taxed at normal tax rates. Tax is also deducted at source in case of interest from a bank.
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Here’s how one can reduce the tax liability in case of FMPs
• If the investor falls in the maximum tax bracket and invests in an FMP with a maturity period of less than 1 year, then that investor may opt for dividend option to reduce tax liability. This is because, under dividend option, the dividend payout will be subject to Dividend Distribution Tax for individual & HUF investors which is lower than the maximum income tax rates.
• If the investor chooses growth option under an FMP of more than 1 year, the investor can either pay tax at 20 percent on the capital gains with indexation of cost or 20 percent without indexation. If the rate of inflation is substantially higher, then indexation would be beneficial, otherwise payment of tax without indexation may be more beneficial.
• In case of FMPs of more than one year, choice of growth option is advantageous in comparison to dividend option from the point of view of tax.
• Under FMPs where multiple indexation benefits can be availed, (dependent on tenure of the FMP) the tax incidence calculation will be done with indexation benefits.
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One should also know that indexation benefits can be availed by making an investment in FMPs, which are not available under other avenues of investment like bank FDs. Moreover, returns from investment avenues like NSC are fully taxable and returns in Post Office MIS also do not carry tax benefits.
( With inputs from utimf.com)