Funds come up with a winner

Collection under fixed-maturity plans doubles to Rs 28,571 cr.

Mutual funds seem to be stealing a march over banks that have started luring investors with higher fixed-deposit rates.

The total assets under management under fixed-maturity plans (FMPs) have nearly doubled this year. At the end of July, these schemes had a combined corpus of Rs 28,571 crore.

Industry sources said 14 FMPs with varying maturities had been launched in August alone, and the collections were expected to be at least around Rs 4,000 crore.

Interest rates on FMPs are as attractive as bank deposit rates, and, on account of lower taxes on mutual funds, the post-tax returns are better. FMPs, essentially targeted at corporate and high networth investors, combine the tax efficiency of mutual funds with the safety of fixed deposits.

"There has been a lot of appetite for these schemes from high networth individuals, since they generate significantly better post-tax returns," said Sameer Kamdar, national head, mutual funds, Mata Securities.

The AMCs that have launched FMPs this month include Reliance, ABN Amro, Principal, HSBC, UTI, HDFC, LIC, Prudential ICICI, JM Financial, DBS Chola, and SBI. At present, 90-day FMPs are offering around 6.85-7.10 per cent, while one-year FMPs are offering around 8.10 per cent pre-tax. A 26-month FMP launched by HDFC Mutual is offering 8.45 per cent.

Since mutual fund dividends attract only a dividend distribution tax of 22.24 per cent for corporates, and 14.24 per cent for individual investors (interest on deposits and corporate bonds attracts the marginal income tax rate), mutual funds usually package fixed-term deposits and bonds as mutual fund schemes called FMPs.

Thus, while an 8.1-per-cent one-year FMP would yield a post-tax return of 6.96 per cent for an individual investor in the top income-tax bracket, a bank fixed-deposit offering a similar rate would yield only 5.37 per cent net of tax.

These schemes usually come with a quarterly or annual term, and the shorter term schemes are a huge hit with corporate investors that seek to lower tax incidence.

Mutual funds charge as low as 5 to 10 basis points as expenses, which is really low. Though the funds make wafer-thin margins on these schemes, they can boast of stable asset sizes. Even for retail investors in the top tax-bracket, again, these schemes make eminent sense.

FMPs produce predictable returns over the desired time period since the maturity of the portfolio is matched with the tenure of fund schemes.

Unlike mutual fund schemes that suffer from volatility and, hence, risk of erosion in asset value, these products, structured as closed-end funds, carry no interest rate risk.

Whether yields rise or fall, the asset value of these schemes is protected as deposits/bonds are held to maturity.