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Fixed
Maturity Plan |
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Safe,
predictable and better post-tax returns than bank
FDs Rising interest rates not only mean rising
EMIs but also offer an opportunity to earn higher
returns. Debt schemes are now offering attractive
returns with short-term rates in the region of
8-10%. Call money rates have been moving higher
to about 7.5-8% due to tight liquidity conditions.
With the RBI deciding to raise the cash reserve
ratio (CRR), liquidity conditions have worsened.
Tightness in the money markets is expected to
continue till the end of the current financial
year and investors can consider investing in short
term options like FMPs or floating rate schemes.
Fixed maturity plans, or FMPs as they are popularly
called, are close-ended funds with a fixed tenure
and invest in a portfolio of debt products whose
maturity coincides with the maturity of the product.
The primary objective of a FMP is to generate
income while protecting the capital by investing
in a portfolio of debt and money market securities.
The tenure can be of different maturities, ranging
from one month to five years. FMPs can be compared
to fixed deposits of a bank. While a fixed deposit
offers a 'guaranteed' return, returns in FMPs
are only 'indicative'. Typically, the fund house
fixes a 'target amount' for a scheme, which it
ties up informally with borrowers before the scheme
opens. That way it knows the interest rate it
will earn on its investments, providing the 'indicative
return' to investors. |
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Benefits
of FMPs
FMPs offer many benefits like tax efficiency,
fixed tenure and low sensitivity to interest rates.
The minimum investment amount is usually Rs 5,000,
which a retail investor can easily invest.
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Capital
protection:
FMPs have less risk of capital loss than
equity funds due to their investment in debt and
money market instruments.
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Low
interest rate sensitivity: As
the securities are held till maturity, FMPs are
not affected by interest rate volatility. The
actual returns are more or less close to the indicative
returns declared at the scheme's launch.
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Lower
cost: FMPs involve minimum expenditure
on fund management, as there is no requirement
for a time-to-time review by fund managers to
buy/sell the instruments constituting the fund.
Since these instruments are held till maturity,
there is a cost saving in respect of buying and
selling of instruments. |
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Tax
benefits: FMPs score over fixed
deposits because of their tax efficiencies both
in the short-term as well in the long-term. |
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