What you should do with FMP opportunities in the market

Arnav PandyaThere has been a change in the Fixed Maturity Plan (FMP) space following the changes in the tax laws some time back. This has a direct impact on the choice for the investor and hence they need to be aware of what they will face when they go out to invest in this instrument. This clarity in terms of knowing properly will help them to make the right decision and this need to be factored into their goals too. The goals have to match with the option chosen otherwise there could be a big gap that might not be easy to fill. Here is a detailed look at the issue and the manner in which this should be handled.Nature of investmentThe nature of the fixed maturity plan is such that they are a substitute for fixed deposits that one would keep with banks. These plans are close ended funds that are in operation for a fixed time period which means that there is a specific duration for which the fund would be in operation. At the end of the time period the mutual fund will sell the assets of the fund and return the money to the investors based on the net asset value prevailing at that point of time. Since there is a clearly defined time period they are thought to be the right choice for someone who wants to invest for specific time duration because this feature matches that of a fixed deposit and at the same time the FMP will be more tax efficient. All this will result in a higher net return for the investor at the end of the day.TaxationThere has been a change in the taxation for the capital gains for debt funds and due to this the change would be applicable for the FMP also as they fall within this category. Earlier the holding of the fund for a period of more than one year led to a situation where these would be classified as a long term capital asset and the long term capital gains would be applicable on it. The period was increased to three years to bring this on par with other long term capital assets. This meant that the FMP that were maturing after a year or so would be classified as short term capital gains and this would have a higher tax impact on the investor. Fund actionThe mutual funds on their part took immediate action with many funds rolling over their schemes when they came up for maturity after a period of a year. This meant that the investors who continued with the fund would be able to hold on for a longer time period and they would get the benefit of the lower tax rate on long term capital gains. However this also resulted in a situation where the investor needed to have goals which would allow for the holdings for a longer time duration.The question that many investors face is whether the funds have now stopped launching new funds with shorter time duration and whether only longer duration funds are available. The situation on this front is good for the investor as there are some very short term options that one will find open for subscription. On the other hand it is seen that a majority of the longer duration funds are those that are for a period of more than three years. This is mainly for the investor to ensure that they are able to take the tax benefit but it also means that the choice is often restricted for the investor in case they want to invest for medium time duration into FMPs.