FMPs remain an option for investors who believe interest rates could head downward over time and wish to lock in the current rates. TMFs have very low expense ratios, which makes them cost-efficient.
Sebi on Friday imposed a penalty of Rs 50 lakh on Kotak Mahindra Asset Management Company (AMC) and barred the fund house from launching new fixed maturity plan (FMP) scheme for six months for violating regulatory norms. The markets regulator has directed the fund house to refund a part of the investment management and advisory fees collected from the unitholders of the six FMP schemes along with a simple interest at the rate of 15 per cent per annum. The case relates to the fund house's investment in certain FMPs. These FMPs of Kotak AMC had invested in Zero Coupon Non-Convertible Debentures (ZCNCDs) issued by Essel Group entities.
'TMFs trump FMPs and FDs when it comes to investing in a high-duration product.'
An additional factor spurring the FMP launches is MFs' desire to retain investors as many such offerings are set to mature over the next two months.
Heed your liquidity needs before investing in an FMP.
According to industry players, over 50 FMPs have exposure to Zee Group companies.
TMFs invest in a public index, so investors know beforehand which instruments the fund will invest in.
The Rs 38-trillion mutual fund (MF) industry is going through a new fund offer (NFO) rush. Since July 1, the industry has launched close to 70 NFOs. This follows the completion of a near three-month embargo period when the industry had vowed to not launch any new offerings till the time it implemented norms around pooling of investor accounts. As a result, between April and June 2022, the industry was able to launch just three NFOs.
Invest with a fund house with pedigree and reputation.
What are FMPs and should you invest in them?
One category which stands out is fixed maturity plans due to its tax benefits, notes Prateek Mehta, CEO and company-co-founder, Upwardly.in.
It's that time of the year, when fund houses roll out their FMP (fixed maturity plans) products in response to the attractive yields on corporate bonds. Expectedly, investors view FMPs as a means to clock a higher return at relatively low risk (actually many investors believe there is zero risk in an FMP). While this is mostly true, some points about FMPs are noteworthy.
'Investors need to find out how the FMP's assets are distributed and ensure the investments are in high-quality names.'
It is advisable to avoid a fund until it develops a track record.
Since the last year, fixed maturity plans, or FMPs in short, have been gaining considerable popularity among conservative investors. The prime reason for this lies in investors seeking a safer alternative to equity funds, with decent returns and tax efficiency.
Use fixed maturity plans to tide interest rate volatility if you're okay with lock-in because longer duration. FMPs can give up to annualised 7.7 per cent returns.
This product was first introduced by ICICI Prudential Mutual Fund (ICICI Prudential FMP Series 33) and Deutsche Mutual Fund in February. Recently, Birla Sun Life Mutual Fund has also floated a similar fund. The Nifty return, multiplied by the participation ratio (that is pre-decided by the fund) is the final returns. In Aviator, the participation ratio is 140-145 per cent, leading to returns of 43.14-44.5 per cent in our given example.
It is a toss-up between liquidity and higher returns; if the tenure is more than three years, FMPs score.
For FMPs, it's been quite a journey from seemingly-innocuous, yet popular investment avenues to limelight-hogging villains.
The Association of Mutual Funds in India (Amfi) has already taken up the matter with the market regulator and the finance ministry.
If you are planning to invest in Fixed Maturity Plans, think twice. Because most mutual fund managers believe that FMPs are unlikely to give higher returns as they did last year. And, this is beginning to show in their collections as well. In March 2007, FMPs had collected Rs 30,869 crore (Rs 308.69 billion). In March 2008, they attracted only Rs 21,688 crore (Rs 216.88 billion). Even in April this year, 62 schemes collected only Rs 1,126 crore
If you are looking for a fixed income avenue that yields a reasonable return with minimum risk, adequate liquidity and tax efficiency, FMPs will provide you with an effective shelter.
While FMPs no longer offer the same short-term advantage, it is still a good product for the medium term.
One should base the decision on one's potential liability under the new tax rules.
Interest rates on bank FDs have started coming down and rates on other fixed-income products will also decline. Investors should lock in to instruments offering higher returns.
Customers need to weigh whether they will be better off selling their mutual fund holdings or taking a loan against it.
Invest in liquid funds if you have a horizon of three months, ultra-short-term for six months, and low-duration funds for one year.
'Why are FMPs used as a vehicle for promoter funding against listed shares?' asks Debashis Basu.
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Indian households put bulk of savings in bank deposits and insurance; the returns are minimal. If you're part of this, change.
Rules applicable from April 1, 2014; investors who have already redeemed will also have to pay tax
To provide similar extended time limit for payment of tax deducted from payments made to non-residents, it is proposed that the deductor shall be allowed to claim deduction for payments made to non-residents in the previous year of payment.
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