What are FMPs?

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what are fmpsAre Fixed Maturity Plans (FMPs) just the latest investment fad?-Answers to the frequent asked question-What are Fixed Maturity Plans (FMPs)

Fixed Maturity Plans are suddenly in the news these days. Every business newspaper issue has at least a few paragraph issues devoted to Fixed Maturity Plans or FMP s

The current buzz about Fixed Maturity plans have seen FMPs move to the investment horizon of the mainstream common investor. Earlier, FMPs used to be in the investment domain of only large companies and HNIs (high networth investors. In short, Fixed maturity plans have changed from being an arcane investment of the super rich and corporates and moved into the public domain

Fixed Maturity plans or FMPs are nothing but close ended debt funds

If you are a finance whizkid, or employed in the finance profession, you probably dont need me to explain about fixed maturity plans any further. But if you have got one of those newly fangled MBAs, where they only teach you to drink, here are some more details about Fixed maturity plans. You could even read the FMP blog if you like Fixed maturity plans as part of your investment portfolio

Where do fixed maturity plans invest in

Fixed Maturity Plans , more popularly known by their acronym “FMP” are debt funds, that invest in Government securities and company debt. That means that fixed maturity plans,typically have no equity component, unless you invest in a FMP that chooses to have a limited equity component

Are Fixed Maturity Plans close-ended mutual funds?

Yes, apart from investing in debt, fixed maturity plans belong to the breed of close-ended funds. Again for the MBA pack, close ended funds mean that fixed maturity plans have a definite end date

Being close ended funds, fixed maturity plans offer flexibility to their fund managers and let them plan on their exact investments even at the IPO stage. As a result, even investors can know in advance about the approximate yields they can get by investing in these FMPs at the IPO stage

Why are fixed maturity funds (FMPs) tax efficient and superior to bank Fixed Deposits (FDs)

Fixed Maturity Plans are great investment options and are highly tax efficient. Here is a simple tax calculation that demonstrates the tax efficiency of FMPs vs FDs

For one year FMP, the tax works out to 10% without indexation and 20% with indexation. Indexation benefits for Fixed maturity plans are high, since the inflation rates are high, as a result, you may have to pay very little tax for a FMP

For example, if you invest Rs 1,00,000 for a one year FMP, and assume the Fixed maturity plan gives you a gain of 10%- approximate Rs 10000. The capital gains tax for the Fixed Maturity Plan works out to be Rs 1000 without indexation and 1250 with indexation. However, even at a conservative inflation rate of 8%, the tax with indexation applied on the Rs 1250 capital gains tax is practically nil

In contrast to the FMP, the bank fixed deposit (FD) has a tax rate of 30%, for the same investment, the capital gains tax will be around Rs 3333

In short, FMPs or fixed maturity plans are better than FDs, in terms of tax benefits for an investor- a no brainer

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