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Akhil Mittal, senior fund manager of Tata Asset Management says that investors whose investments in fixed maturity plans (FMPs) are nearing maturity are shifting to other products, especially hybrid or balanced funds, instead of rolling over the FMP. Fund managers are seeing investors move to both debt and equity oriented hybrid funds.
Reason: "The major issue for investors is the sudden change in tax treatment of FMPs. They are not comfortable staying locked-in for three years (incrementally another two years, post roll-over). At the same time, equity markets have been doing well for some months now giving investors the comfort to invest. Plus, there is no long-term capital gains tax on equities after one year," says Mittal.
Fund houses have been asking investors to roll over their money in FMPs. They believe that if one has stayed invested for 15-18 months, it only makes sense to stay invested for the remaining three years as the tax blow will be substantially reduce the maturity corpus.
"We need to take into account the macro economic factors. There are no two ways about the fact that the interest rates will come down. Just that, nobody knows when will it happen. Today the interest rates are at the peak and hence it makes sense to lock in your money at a higher yield if you have a long term investment horizon (of two to three years). Hence, rolling over the FMP will make more sense," explains Killol Pandya, head - fixed income at LIC Nomura Mutual Fund.
Tax efficient investment planning should also be considered. This also makes way for rolling over the FMPs unless you need cash in the near future.
He adds that an open ended fund is recommended only for those who have shorter term investment horizon of 6 to 7 months. This is also because capital protection is of utmost importance when time in hand is less.
Certified financial planner Malhar Majumder feels otherwise. "Someone with a lower risk appetite would rather invest in a debt-oriented hybrid (open-ended) fund than stay locked-in. Reason: In 2012, most thought the interest rates have peaked and hence advised locking into to those rates. But, then the rates were increased and many lost money. Given markets cannot be timed, it is better to invest in open-ended funds," he says.
Additionally, by staying invested for three years there is no special exemption provided for staying locked-in in an FMP. Both FMPs and debt-oriented hybrid funds have identical tax treatment, where the indexation benefit kicks in after three years and short-term investments are taxed at slab rate. Besides both invest in similar maturity bonds. And if interest rates move up, an investor of open-ended funds will have a window to escape.
Of course, if one can stomach equity related risk then equity-oriented balanced funds are a better bet both in terms of returns and tax efficiency.
Mittal has a more balanced view. The upside in FMP is capped when compared to a hybrid fund (as it has an equity component). And the economic conditions will see equities and duration funds do well going forward. To that extent staying put in FMP may not offer as high returns, he says. As staying invested for three years will be tax efficient and interest rates will also come down by then, both debt and equities will offer good returns over next 2-3 years.
According to Value Research, debt-oriented hybrid funds have given 24 (aggressive) to 16 (conservative) per cent in the last one year. And equity-oriented balanced funds have given 44%. FMPs have given between 8% and 11% in the same period.
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