The SBI Mutual Fund has launched 372-day Fixed Maturity Plan (FMP) – Series 63 with the objective to provide regular income and capital growth with limited interest rate risk to the investors.
The investment objective would be achieved through investments in a portfolio comprising debt instruments maturing on or before the maturity of the scheme.
So, the FMP return would be equivalent to the yield of securities with similar maturities prevailing on the date of the investment.
The New Fund Offer (NFO) period of the fund is August 16-22, 2022. The issue price is Rs 10 per unit and the minimum investment amount is Rs 5,000.
The benchmark of the fund is CRICIL Short-Term Bond Fund Index.
Here are some the benefits of the SBI MF FMP – Series 63
As the fund will invest in fixed-return debt instruments, there will be no impact of the stock market fluctuations on the capital investments of the investors and the amount of return on the FMP itself may be predicted.
Short Investment Period
As the tenure of the FMP is 372 days – or 1 year 7 days only – investors needn’t wait long to get the money back. Moreover, short-term debt instruments are considered safer than long-term instruments. So, the risks associated with the fund will be even lower.
However, due to shorter duration of investment, the investors will not get indexation benefit and the gains will be added to the income of the investors to determine the taxable income.
Commenting on the benefits of FMPs, Vineet Patawari, Cofounder CEO StockEdge & Elearnmarkets, said, “FMPs offered by mutual funds are comparable to FDs offered by banks, with the added advantage of better post-tax returns than bank FDs as well as liquid funds. Short-term gains on debt funds (i.e. those held for less than three years) are taxed at the investor’s marginal tax rate, while long-term gains (i.e. those held for three years or more) are taxed at 20 per cent with the benefit of indexation. With fixed deposit returns, the gains will be taxed as per the investor’s marginal tax rate.”
Although there will be no investment in equities, the investments in debt and money market instruments under the scheme may be subject to credit risk, liquidity risk, interest rate risk and reinvestment risk.
There are also instances of default risks, where a company fails to honour its commitments of timely repayments against fixed-return instruments. There were many cases during 2018 and 2019, when many companies with good credit ratings not only failed to repay their debts timely, but also had to close down their businesses. In such cases, the FMP returns become negative and to protect investors’ interests, fund houses either give roll over options to the investors or make partial refunds after segregating the portfolio.
As FMPs are closed-ended funds, investors wanting to take out money before maturity face difficulties in redeeming the units.
“One downside to FMPs is that they can be illiquid. FMPs are closed-end funds, which means that they can only be traded on the stock exchange, where they are listed. However, trading in these units is negligible, which makes FMPs illiquid. Because of this, investors have to be sure that they can hold the units until maturity,” said Patawari.