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It’s all about FMPs Overall RATE RATE (4.00)

Attractive yields and conducive interest rate scenario make FMPs a hot pick for investors. FMPs are targeting to fill up the vacant investment space created by the rise in interest rates.


What are FMPs?

Fixed Maturity Plans (FMPs) are close ended debt funds, which invest in securities that have maturity profiles in line with the tenure of the FMP portfolio. The maturity profile of FMP can be as short as 90 days. It can also be long enough to span more than three financial years. FMPs with shorter duration offer flexibility to perform better under the rising interest rate scenario. Further, some Hybrid FMPs hold equity to a certain extent.

Why invest in FMPs?

There are number of reasons warranting investors to consider FMPs compared with other bank instruments. This starts right from low risk to better tax treatment.


Low risk:

The amount invested in FMPs is protected, as the FMPs invest these amounts in debt and money market instruments, which have a fixed maturity date. Further, investments are held until maturity, making the FMP less sensitive to the volatility in interest rates.


Better tax treatment:

The next big advantage for any investor to remain invested in FMPs is the better tax treatment compared with Bank FDs.


Interest rate risk

FMPs are free from interest rate risk, as they invest in instruments held until maturity, ensuring a fixed rate of return with low-to-nil portfolio churning.


Low expense ratio

FMPs carry a lower expense ratio due to lower management cost involved in managing the FMP portfolios. These funds rarely have a tradable portfolio.


Low credit risk

FMPs also mitigate the credit risk prevailing in the debt market by investing in only those instruments having the highest ratings.


Listing and liquidity

FMPs are listed on the exchanges to accord liquidity to the investors.


Where do FMPs invest?

  • FMP portfolio holds debt instruments, which have substantial liquidity
  • Certificate of deposits
  • Commercial papers
  • Treasury bills
  • Collateralized borrowing andlending obligation
  • Government securities
  • Non-convertible debentures
  • Floating rate instruments
  • Repo
  • Securitized assets and pass through certificates.


Indexation benefitsandtax efficiency

FMPs with more than oneyear’s tenure have the benefit of indexation. Under this, the initial investment amount is inflated by the existing rate of inflation. This exercise increases the base amount over which capital appreciation benefit is calculated. Higher base decreases the taxable profit. Thus, investor benefits from lower taxation. If the plan tenure spans more than two financial years, it qualifies for a double indexation benefit.


Why areFMPs superior tobank fixed deposits?

Current FMP yields compare to a bank FD with 1-1.5 year tenure would provide investors with better pre tax returns. While interest income from bank FD attracts more tax,FMPs return a comparatively higher post tax income for the same amount invested.



Going forward, we believe high interest rates are here to stay for near-to-medium term. The investors can grasp this opportunity and invest in Fixed Maturity Plans (FMPs).


Happy investing…


Written by : manish tawde

MF dividend decoded Overall RATE RATE (0.00)

Most investors are aware of the three options available in mutual funds (MF), which are dividend payout, re-Investment, and growth. The use of these options varies with each investor. However, investors are not aware of dividend functionality, calculation, and tax implications. Let us attempt to understand these in details.


(A) Dividend payout:


In this option, profits of mutual funds are distributed among the investors at various intervals referred to as dividends. MFs would pay these dividends only when they perform well. The decision to pay dividend solely vests with the fund manager. When MFs declare a dividend, the NAV falls by the exact same amount. For instance, if a fund's NAV is Rs.15 and it declares dividend declared is Rs.2 per unit, its NAV falls to Rs.13. With the new regulations, fund managers can declare dividend from only the surplus account.



Dividend is a kind of periodic profit booking. Dividend is not an additional benefit, as it is paid from the profits generated by the scheme.  



Tax implication:


The dividends received through equity funds, balanced funds (funds with more than 65% in equity), and debt funds are tax-free at the hands of the investor.


Using this option:


This option is usually meant for investors:


      Looking for some short-term returns

      Wanting to reduce their risk from the capital market, as fund managers usually pay dividends when the market is bullish, near its peak, or when the MFs are making sufficient profits

      Who do not track their investments and wish to withdraw partial amounts when the scheme earns a profit

      In Equity Linked Saving Schemes (ELSS), where money is parked for a three year lock-in period 


(B) Dividend re-investment


In this option, dividend paid out is ploughed back into the mutual fund, which means that the investor adds more units in the mutual scheme from the dividend income declared at the existing NAV. The NAV of the fund does not change, it remains the same as in the dividend payout NAV.


Tax implication


For this option of dividend re-investment, the time period is calculated separately for each dividend reinvested.

Using this option:


This option is used majorly to acquire more number of units whereas the returns in this option and growth are nearly the same. Moreover, there is the benefit of tax deduction on dividends reinvested. This applies only in case of ELSS schemes. The dividends reinvested would be considered as an additional investment under section 80C.


(C) Growth


This option tends to provide investors with an appreciation in the long term. For instance, the price appreciation reflects on NAV. There are no payouts in the midst.


Tax implication


In the growth option, capital gains tax (CGT) is the important tax to consider. CGT refers to the tax charged on profits from the sale of units. If the investor:

  • redeems the investment in less than 1 year he/she has to pay a short-term CGT at 15%
  • redeems the investment after the completion of 1 year , the long-term CGT would be NIL.


Using this option:


  • This option is meant for investors looking for long-term returns, as they are not interested in small payouts.
  • This option is also meant for those investors who are bullish in the market or have a long-term objective for investment.


To illustrate the calculations of the above mentioned options, we have provided you with the following chart, which will help you to analyse and decide on investment options:





Written by : Y V Suryakiran

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