We have many FMPs from different Asset Management Companies from time to time. It is a very good instrument and offers few benefits which are unique if compared to other debt instruments. I’m pleased to share a detailed product note on this subject to refresh the memory of all.
About FMPs:
FMPs are closed ended funds with a fixed maturity period which could be as little as 15 days or as long as five years. Objective of this investment is to protect the investors against market volatility and generate steady returns.
Working of FMPs:
FMPs are managed as a passive scheme and the fund manager looks to invest money in instruments with maturities corresponding to the maturity of the plan. For example – a 90 day FMP will invest in instruments that mature within this period. The fund manager locks the investments at a certain yield at the time of inception itself which protects the principal and fights against volatility.
They invest primarily in fixed return investments like Government bonds and money market instruments (very short-term fixed return investments) which are almost risk-free investments.
Investment Pattern:
FMP predominantly invests in debt instruments or some high quality corporate papers with a rating, Government Securities, bonds etc.
Advantages of investment in FMP are
a) Fights interest rate risk
b) Fights market volatility
c) Capital Protection
Tax Calculation:
Returns generated by FMPs come under the purview of Capital Gains.
For Short-term: less than a year
If an investor puts money in a FMP of less than one year tenure, then the entire capital gains is combined with the income and is taxed according to the tax bracket the investor falls into. If the investor falls in the tax bracket of 30%, then the returns are taxed at 33.99% (including surcharge and education cess).
For Long-term: One year or more than one year
If an investor invests in a 12 months or more than 12 months series, then he would be taxed at :
10% without indexation
20% with indexation
Who should invest in ?
For investors who are risk-averse and do not want to play with their savings, this is the option. Even those investors who have some money and want to invest for a very short period of time then this is the best option. Investors can also avail tax benefits by investing in a one year plus FMPs which offers indexation benefits, especially in the month of March.
