Meanwhile, park spare cash in short-term debt.
With the Reserve Bank of India (RBI) signaling that there could be some rise in interest rates in the coming year, fixed maturity plans (FMPs) of mutual funds are likely to find themselves in focus again.
Fund houses have already started launching more of these. In the past two months, HDFC Mutual Fund has made three new fund offers. A number of others like Reliance, ICICI Prudential and JM Mutual Fund have also launched their schemes. In fact, in the past six months, more than 20 FMPs have been launched.
The interesting part is that most fund houses are launching schemes with tenures of over a year. This is because of the strictures issued by the Securities and Exchange Board of India (Sebi) earlier this year, which disallowed funds from declaring 'indicative portfolios’ and ‘indicative returns’. Also, FMPs will now have to be listed on the stock exchanges.
“Fund houses would prefer to launch longer tenure products because it does not make sense for them to introduce short-term products and keep on listing it. The process is too long and not worth the time,” said an industry expert.
So, what should the investor be doing? Most believe this is not the best time to put your money in FMPs. Says Ramanathan K, head (fixed income & structured products), ING Investments: “FMPs will fetch better returns after the RBI hardens interest rates next year. So, it makes sense to wait for some time.”
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One-and two-year FMPs are offering 6-6.5 per cent and 8 per cent, respectively. These numbers could improve significantly in the next few months.
For those who are sitting on cash now, experts advise investing in short-term (six months) debt funds. The returns are in the vicinity of 6-5.5 per cent. And, since these funds are open-ended, one can easily withdraw and invest in FMPs once the interest rates are revised upwards and get a better return.
However, one should note that the returns will be taxed as per the income of the investor. For the highest income bracket, the tax would be 33 per cent.
The other option could be bank fixed deposits (FDs). Banks are offering rates of 5.25 to 6.25 per cent for six-month deposits. For instance, SBI is offering 5.25 per cent, while IDBI Bank is offering 6.25 per cent for FDs of this tenure. ICICI Bank is offering 6 per cent. The interest income, though, will be taxed as per the income of the individual.
Experts agree that if the RBI revises rates upwards in January, FMPs will fetch more attractive returns. But if the decision is delayed, one could still invest in the March period for a year or more to take advantage of double indexation benefits.
That is, the money invested in a scheme in, say, March 2010 which will mature in May 2011 will fetch inflation indexation benefits of both 2009-10 and 2011-12.
The advantage with FMPs, experts said, was that it generates steady returns over a fixed-maturity period and makes the investor immune to market fluctuations. And any upward revision in rates would definitely offer more choices to investors, as fund houses would aggressively launch more schemes.