5 Reasons To Invest in FMP Fixed Maturity Plans Today

October 10, 2013 by  

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FMPs (Fixed Maturity Plans) are a good option, if you are an Indian, you are wondering where to invest in India today

FMP - 5 reasons to invest

Why consider FMPs or Fixed Maturity Plans :

  • The equity or share market has crashed
  • The debt market has crashed
  • Fixed deposits (FDs) have poor post tax returns
  • You fear the risk of default with corporate FDs
  • The solution : Invest in FMPs or Fixed Maturity Plans!

5 Reasons to invest in FMPs (Fixed Maturity Plans)

The equity market is a poor alternative to FMP investments today

The crash in the equity (share) market has all of us scared. Is there more pain in the market? Will it ever recover? Will interest rates ever decrease? The NIFTY is now heading towards 5000, FIIs are exiting. On top of these factors, there are rumours of a pending strike on Syria. The high cost of capital in India suggests that the economy will not revive soon and the equity share market will be in doldrums for some time. So, equities are out as an investment option. Even if they are up temporarily, the QE abandonement by the US Fed hangs like a damocles sword on the market. Fixed Maturity Plans are the option to consider.

FMP vs debt mutual funds : A no-brainer

Earlier in the year, as predictions of lower interest rates hit the market, everyone wanted to get into the debt market. However, after rumours started coming in of quantitative easing being eased out by the US Government, there has been a drastic pullout of FIIs from the debt market. This has led to debt funds or gilt funds not being an option anymore for Indian investors

FMPs Mutual Funds investments are less affected by FII impacts due to reducing QE- quantitative easing

Now, we come to FMPs or Fixed Maturity Plans. These are special debt NFOs (new fund offers) offered by mutual funds. However, whats unique about FMPs is that FMP Mutual Fund investments are for a specific duration. This ensures that the mutual fund managers can lock in to the high interest rates available now and the indicative yields are usually accurate. For example, if you buy a FMP fixed maturity plan mutual fund for 6 months, the mutual fund manager will typically invest in fixed income instruments of that known maturity. This essentially reduces interest rate risk significantly. As FMPs do not work like debt mutual funds, they are not affected by sudden withdrawls in the funds

FMPs, being illiquid, are actually an advantage during this time

FMPs (Fixed Maturity Plans) are supposedly liquid debt instruments per RBI and are traded in the debt market. But in reality, not much trading takes place in FMPs. This is actually an advantage in today’s debt market since fixed maturity plans are not subject to the fickle investment decisions of global FIIs. Debt mutual funds barring fixed maturity plans have totally collapsed, but FMP investments are still doing well

Fixed Maturity Plans (FMPs) have tax advantages over FDs and other investments through indexation

The tax advantages of FMPs over FDs is well documented. The indexation benefits of FMPs are great especially if the fixed maturity plans span across multiple years. This is a great advantage for Indian investors in the 20% or 30% tax brackets and helps them save a lot of tax

In summary, fixed maturity plans are the way to go these days, however, always watch the fine print!

While Fixed Maturity Plans may be preferred investment vehicles with mutual funds launching a new one every day, you have to make sure that you read the prospectus and invest in FMPs that invest in AAA or AA rated securities only and also look at the past performances of the individual mutual fund managers

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