Tuesday, September 17, 2013

Secure your money and future with FMPs :

Now you can safeguard your financial portfolio against rising interest rates, and consequent loss of value, through Fixed Maturity Plans (FMPs). These schemes are more relevant today given the volatile market conditions and the prevailing high interest rates.

The last few months have been worrying for many due to the volatile market conditions, due to a set of domestic and global factors. We have even witnessed negative returns from certain fixed income investments.

Persistently high inflation and the fall in the Indian Rupee in the last few months compelled the Reserve Bank of India (RBI) to take some stringent measures. It’s expected that the interest rates on loans may rise due to the tight liquidity measures taken by the RBI. We have seen a few banks hiking the rates on the loans which they provide.

The rise in interest rates on loans leads to an increase in the EMI burden on many individuals who are having floating rate of interest on their loans. Even corporates are facing the brunt of these high interest rates.

But we have a golden opportunity in this high interest rate scenario.

The Opportunity

The opportunity is in FMPs. Yes, FMPs are highly advisable in the current interest rate scenario. This is because currently commercial papers and certificate of deposits are close to their peak yields and FMPs predominantly invest in these papers. It is advisable to lock-in your investments at these high rates. While CDs are instruments that are issued by banks, CPs are issued by companies.

FMPs are similar to fixed deposits, but with much better tax benefits. There are various FMPs currently available for varied tenures like a month, 1 year, 3 year, etc.

What are FMPs?

FMPs are close-ended mutual funds which generally offer returns that are relatively stable though not guaranteed.  Closed- ended funds are those funds which are open for a limited time period or a few days during which time the investors can invest into. Post the closing date, these investments will be locked-in till maturity (various tenures available).  Since FMPs are closed ended scheme one can invest during the NFO period only. Once the NFO is closed, investor can neither invest nor redeem it through Mutual Funds like open ended scheme. The only option to exit from any FMP is through stock exchange where they get listed as mandated by SEBI.

Choosing an FMP

You can choose FMPs which are in line with your investment horizon  or goal i.e if you have plan to buy a car or bike a year down the line and wish to save some money for your down payment, you can select an FMP with a maturity profile of a 1-year. Any volatility in interest rates during this holding period would not affect the value of the fund.  So, in the situation like the current market conditions with high volatility, these FMPs provide a large opportunity to safeguard your investments against volatility.


Some of might debate why not fixed deposits in the current situation? FMPs are more tax-efficient compared to traditional fixed deposits, and unlike fixed deposits, FMPs enjoy capital gain indexation benefit if held for more than a year. Interest on fixed deposits, on the other hand, will be taxed at your regular income slab rate. But you need to note that FMPs of less than one year will be taxed at your income tax rate.

A word of caution

Though FMPs offer several benefits one needs to be aware of some conditions.

· Exit from FMPs is not easy, as they are close ended funds unlike bank FDs, where one can opt for premature withdrawal by paying a penalty.

· The credit risk (or the default risk) still exists. As per SEBI guidelines, fund houses are not allowed to give 'indicative portfolios' and so there is no mechanism to make sure that the money will be invested only in high quality papers as mentioned by the fund houses in their offer document.

· So it’s advisable to choose FMPs from reputed fund houses only.

· The offer document or the scheme information document or the key information memorandum carries these details. These documents are available on the fund’s website.

Capture the existing investment opportunity and protection to your investments even in the current volatile market conditions and current high interest rate scenario.
Source : myuniverse

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