Use FMPs to tide interest rate volatility if you're okay with lock-in

Longer duration FMPs can give up to annualised 7.7 per cent returns

In the current uncertain interest rate scenario, investment advisors are suggesting fixed-maturity plans (FMPs) to investors looking at debt funds. The pitch: Interest rates may go up from here so lock in your investment. Also, if an investor puts in money in March 2018 and the FMP matures after 37 months, the individual will get indexation benefit for four financial years.

While FMPs do make sense in the current interest rate environment, they suit investors who don’t want volatility in their investments and don’t mind locking in their funds for slightly over three years. “If an investor is fine with volatility, then they can look at short-term debt funds that follow accrual strategy and have an average portfolio maturity between two and three years,” says Hemant Rustagi CEO, Wiseinvest Advisors. He feels that open-end short-term debt fund can give marginally better returns.

Fund houses don’t reveal expected returns upfront. But looking at their portfolio, investment advisors say that they would give returns in the range of 7.7-7.8 per cent annually if the individual makes direct investment and around 7.4-7.5 annually if he invests through an agent. Investors can expect similar returns or up to 0.5 per cent higher returns in a short-term debt fund.

Fixed-maturity plans are closed-end debt schemes that invest in various debt papers and hold them until maturity. As they don’t trade, they don’t have interest rate risks. They only carry credit risk, that i

It is true that if you invest in a long-term FMP in the month of March, you will get indexation benefit for four s, the papers that they have invested in can face downgrades or can default. Most mutual fund houses provide and indicative portfolio to investors. Go with the fund house that’s investing in AAA-rated papers, even if the interest rates are slightly lower. While the longer duration makes sense, financial planners say for shorter tenure investors should look at liquid funds.years. Typically, such FMPs are for the duration of 37-40 months. Indexation benefit brings down the tax substantially. “The indexation benefit of an additional year would not make a huge different in increasing returns. So, don’t fall for that part of the sales pitch,” says Arnav Pandya, a certified financial planner.

But if an investor can stomach volatility, there are few other options they can look at instead of FMPs. For those with investment horizon of up to three years, short-term debt funds are an option. Pandya suggests that investors can also look at dynamic bond funds if they have a three- or four-year horizon. “They took a hit recently, but the fund managers have made the required changes,” says Pandya. To tide the current volatility, ideally an investor should get into liquid or ultra-short-term funds. Once there’s clarity on the interest rates, investors can accordingly invest. But moving in an out of schemes means paying short-term capital gains tax. Instead, they can look at dynamic bond fund where the fund manager changes portfolio actively based on interest rate movement and other factors.

If you don’t need money for four-five years, Rustagi suggest opting for equity savings schemes. These are balanced funds that invest 35-40 per cent in equities and the remaining in debt and arbitrage. They are, however, taxed as equity funds.