Tuesday, May 26, 2015

FMPs


FIXED MATURITY PLANS (FMPs) are similar to bank fixed deposit in that they offer a fixed return for a specific tenure. The difference is that they are mutual fund schemes. These closed-ended debt schemes are structured in such a way that the duration of the debt papers that form part of the scheme’s portfolio are aligned with the tenure of the overall scheme. The drawback, or rather a constraint, is liquidity as an investor cannot withdraw funds before the due date. The biggest attraction of FMPs was the tax arbitrage they enjoyed over bank deposits. 

For Example – If an individual invested in a 13 month bank deposit offering a rate of 9% pa, he would earn Rs. 9,750 over a period of 13 months and the effective post tax return (assuming the individual falls in the 30% tax bracket) would be Rs. 6,825. If the same amount was invested in an FMP of the same rate (9% pa), his earning would have Rs. 9,750, same as a bank FD but the effective post tax return would have been Rs. 9,632. Thus, as you can seen, in the case of an FD, the tax payable would be Rs. 2,925 and for an FMP it was merely Rs. 118, offering investors a clear saving of Rs. 2,807 in terms of tax outgo.







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