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.
FMPs Vs FDs
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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