When it comes to risk-averse fixed-tenure investments, most of us rarely look beyond fixed deposits. Many people are unaware that fixed maturity plans (FMPs) can assist produce comparable returns while also providing tax benefits.
Defintion of FMPs:
FMPs are a sort of debt mutual fund with a set maturity, which can range from one month to five years. Investors can only invest in these funds during the NFO (New Fund Offering) period and then withdraw their money at the conclusion of the term. Aside from the fact that these funds can be bought and sold on stock markets, their liquidity is usually relatively low. Once the NFO of an FMP is over, you can no longer buy further units.
In What Asset Classes do FMPs Invest?
Investments in fixed-term debt instruments, such as corporate bonds, bank FDs, CPs (Commercial Papers), or CDs (Certificate of Deposits) are made by FMPs. For example, if an FMP has a 3-year maturity, it may invest in CPs with a 3-year maturity. Once the money is placed in a Fixed Maturity Plan, fund managers are only required to make minimal adjustments to the portfolio.
This is not the case with bank FDs, where you receive the precise return stated on your FD certificate.
At the time of the NFO, the fund house only mentions hypothetical returns. However, the returns can be larger or lower when the investment reaches its maturity point. In most circumstances, the discrepancy between the expected and actual returns of FMPs is negligible.
How FMPs are taxed?
The interest you earn on bank FDs is taxed according to your individual tax bracket. As a result, someone whose FD income is subject to a 30% tax rate must pay 30% of that income in taxes. In this way, FDs are safe investments, but not tax-efficient ones.
FMPs are taxed in the same way as other debt funds because they are a type of debt fund. Investments held for longer than 36 months are taxed at a 20% rate. However, there is an indexation advantage present here. Indexation allows you to adjust the purchasing price of FMP units in accordance with the period's inflation. This reduces your taxable returns from FMPs.
As a result, FMPs with maturities of three years or more are currently quite popular. However, if you choose an FMP with a maturity of less than 36 months, the returns will be added to your taxable income and taxed according to your tax bracket, just like bank FDs.
Investing in FMPs has a number of Advantages:
High Tax Savings After Three Years –
According to the previous discussion, FMPs are an extremely tax-efficient investment option because of the indexation benefit. However, indexation is only available for investments held for a minimum of three years before being eligible for inclusion in the index.
Low Expense Ratio-
According to the previous discussion, FMPs are an extremely tax-efficient investment option because of the indexation benefit. However, indexation is only available for long-term investments.
Risk Reduction-
It is true that FMPs aren't completely risk-free, but the risk level is far lower than that of an equity mutual fund. Because the same instrument is held until maturity, interest rate volatility is also minimally impacted by market conditions.
Investing in Fixed Maturity Plans: Who Should Do It?
FMPs have a long history of delivering higher returns than bank FDs. Keep in mind that FMPs don't have the same level of security as FDs in terms of their returns.
However, FMPs remain a fantastic alternative for anyone wishing to park their extra income for a fixed term ranging from one month to five years while earning better yields than FDs. Even long-term risk-averse investors who are uneasy with the fluctuations and volatility of equity funds can consider investing in one of the top FMPs.
Before you invest, keep in mind that FMPs are closed-ended schemes, and you will most likely be unable to redeem your investment before maturity.
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