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FMPs match fixed deposit returns

Tinesh Bhasin in Mumbai | August 19, 2008 11:08 IST

With banks increasing their fixed deposit rates in the past couple of weeks, fixed maturity plans by mutual funds are also offering higher 'indicative' returns. FMPs can only indicate and not guarantee returns.

For instance, LIC [Get Quote] Mutual Fund and Birla Sun Life Mutual Fund have offered 11 per cent returns for their 13-month FMPs that are closing on August 25.

Other fund houses such as Lotus Mutual Fund, ABN Amro Mutual Fund and Kotak Mutual Fund have indicated returns of 10.65 per cent for small investors.

Banks, on the other hand, are offering 7.5 to 10.5 per cent for fixed deposits of different tenures.

According to Hemant Rustagi, CEO, Wise Invest Advisors, a distributor of mutual funds, all the short-term (less than 91 days) FMPs that closed recently revised their rates upwards of 10.5 per cent. Many of them revised their returns during the tenure of the new fund offering as well.

Tata Mutual Fund, IDFC [Get Quote] Mutual Fund and Franklin Templeton closed their short-duration schemes by offering an annualised yield at 10.7 per cent, 10.75 per cent and 10.6 per cent, respectively.

When the issues had opened for subscription, these funds were offering returns in the region of 10.3-10.5 per cent. A senior official at Lotus India Mutual Fund claimed that for their current schemes, they intend to keep on revising the rate of return till the last day to keep themselves abreast with the interest rate scenario.

However, before investing, it is important to remember that FMPs are a riskier form of investment as against FDs. This is because they invest in commercial papers and, in bad times, some companies, with whom the FMP funds are placed by the asset management company, could default on their commitments. This could put the principal amount at risk.

In fact, in the last few months, many fund houses have consciously stayed out of papers issued by real estate companies and non-banking financial institutions because they were perceived as riskier sectors. Some even declared this intention in their offer documents.

FMPs are debt-based funds that buy highly-rated money market instruments and commercial papers issued by companies and certificates of deposits issued by banks.

These close-ended schemes have multiple tenures such as three months, six months and over a year or more. Depending on the tenure of the FMP, fund houses invest in CPs and CDs that have a similar maturity period. The minimum amount that can be invested is Rs 5,000.

A factor that makes FMPs attractive is the tax efficiency of these products. "The additional tax benefits attract investors more than the higher yields," said Vikrant Gugnani, CEO, Reliance [Get Quote] Asset Management.

Short-term FMPs are taxed at the rate of 14.16 per cent, if the dividend option is chosen. In the longer tenure ones, that is more than a year, the investor is charged 10 per cent without indexation and 20 per cent with indexation. Also, there are double indexation benefits for tenures of over a year. In comparison, FD returns are clubbed with investors' income and taxed accordingly.

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