Fund houses push FMPs to meet March demand

MUMBAI: Mutual funds are launching fixed maturity plans (FMPs) ahead of the financial year end on March 31 as investors seek to lock in money in debt products with higher rates and better tax benefits. As many as six FMPs with a tenure of 3 years and above (1,100-1,130 days) have been launched by mutual funds such as Reliance, ICICI Prudential, SBI, UTI and Deutsche Mutual Fund of late.
“Investors typically opt for FMPs in March to get triple indexation benefits,” says K Ramanathan, founder and CEO, Spectrum Wealth Solutions.

By investing in March, you get an additional financial year for tax calculation which reduces your tax liability. When the FMP matures in April 2018, you get the benefit of indexation for four years. Due to indexation, investors ended up paying zero tax for their early 13-month FMP and 37-month FMP, respectively, using this method of calculation.

This year, too, investors are betting on this indexation to lower their taxation on these products. “If inflation is equal to or higher than the return on the FMP, then capital gains get nullified and tax liability at the end of the tenure will be zero,” explains Jignesh Shah, founder, Capital Advisors. Typically, March witnesses lower liquidity due to advance tax outgo and corporates moving out of money market segment for balance sheet management. As a result, FMPs tend to give a slightly higher return.

Since FMPs lock in their money immediately, there is no interest rate risk for investors and are less volatile compared to income funds or gilt funds. According to distributors, investors could earn anywhere between 8.25% and 9% on FMPs.

Due to the higher tenure of 36 months, there is lower interest from corporates who till now were larger investors in FMPs. Given this, distributors are pushing these FMPs to high networth investors who do not want an interest rate risk and are keen to lower their tax liability. It is also a last chance for distributors to earn a higher upfront commission with AMFI looking to cap the upfront brokerage to 1% beginning April 1.

However, some analysts feel that openended debt funds may be a better bet for investors at this point of time. FMPs are close-ended, and hence illiquid. In case of an emergency you will have to sell on the stock exchange at a huge discount.

“With interest rates expected to go down further, there is scope of a capital appreciation in open-ended funds.