 "Many large-caps ripe for picking")
With the end of the financial year approaching, mutual fund houses are back to launching and re-launching fixed maturity plans (FMPs), a favourite product of the sector till the tax laws were changed by Finance Minister Arun Jaitley in Budget 2014-15.
A number of fund houses such as ICICI Prudential, Birla Sun Life, UTI, Tata and DSP BlackRock have either launched or filed offer documents with the Securities and Exchange Board of India to launch these products. But, before investing, one should remember the taxation of this instrument has gone through a complete change. Though the product remain attractive in terms of returns, its liquidity has substantially gone down.
Read our full coverage on Union Budget 2016
Says Hemant Rustagi, chief executive of Wiseinvest Advisors: “Now, this is a product that needs to be compared with tax-free bonds or fixed deposits (FD). Compared to both, it looks better because of the indexation benefit.”
Adds financial planner Suresh Sadagopan: “I would recommend it for conservative people who do not mind locking in their money for at least three years, because it is virtually tax-free after that.”
According to sectoral sources, at present, three-year FMPs offer indicative rates of around eight per cent, whereas State Bank of India’s three-year fixed deposit rate stand at seven per cent.
This means a clear advantage, in terms of returns, with some risk for FMPs because they invest in corporate bonds which can turn risky when times are bad. But, even if they offer a lower rate of return than fixed deposit, indexation benefits makes them more tax-efficient.
For example, if you are getting eight per cent from a fixed deposit and FMP’s indicative rate is 7.5 per cent, the returns will be better in case of the latter. Let’s look at some numbers: Even if we calculate the rate of returns in simple interest, the investor will earn 24 per cent in a fixed deposit and 22.5 per cent in an FMP. A person in the income-tax bracket of 30 per cent stands to lose 8.33 per cent as capital gains tax and earn 15.66 per cent as return on investment.
A number of fund houses such as ICICI Prudential, Birla Sun Life, UTI, Tata and DSP BlackRock have either launched or filed offer documents with the Securities and Exchange Board of India to launch these products. But, before investing, one should remember the taxation of this instrument has gone through a complete change. Though the product remain attractive in terms of returns, its liquidity has substantially gone down.
Read our full coverage on Union Budget 2016
Says Hemant Rustagi, chief executive of Wiseinvest Advisors: “Now, this is a product that needs to be compared with tax-free bonds or fixed deposits (FD). Compared to both, it looks better because of the indexation benefit.”
Adds financial planner Suresh Sadagopan: “I would recommend it for conservative people who do not mind locking in their money for at least three years, because it is virtually tax-free after that.”
According to sectoral sources, at present, three-year FMPs offer indicative rates of around eight per cent, whereas State Bank of India’s three-year fixed deposit rate stand at seven per cent.
This means a clear advantage, in terms of returns, with some risk for FMPs because they invest in corporate bonds which can turn risky when times are bad. But, even if they offer a lower rate of return than fixed deposit, indexation benefits makes them more tax-efficient.
For example, if you are getting eight per cent from a fixed deposit and FMP’s indicative rate is 7.5 per cent, the returns will be better in case of the latter. Let’s look at some numbers: Even if we calculate the rate of returns in simple interest, the investor will earn 24 per cent in a fixed deposit and 22.5 per cent in an FMP. A person in the income-tax bracket of 30 per cent stands to lose 8.33 per cent as capital gains tax and earn 15.66 per cent as return on investment.
An FMP investor will get the benefit of inflation indexation. Assuming inflation rate to be five per cent annually, the indexation benefit will be 20 per cent (because for a three-year FMP, the indexation benefit will be of four years, if you invest before March-end) on returns of 22.5 per cent from an FMP. The taxation: 20 per cent of 2.5 per cent returns. The difference: A substantial one six per cent (FD 16 per cent vis-a-vis FMP 22 per cent). “Post-tax returns of over seven per cent annually is quite a good. Only instruments like Public Provident Fund offer higher post-tax returns, but there are an upper limit on investment,” says Sadagopan.
However, Rustagi warns one needs to be clear that they want to be invested for the entire period because exiting in the interim will hit them hard. With the change in the tax guidelines in Budget 2014-15, if you exit an FMP before three years, the capital gains will be added to your income and taxed according to the income-tax slab. The instrument, therefore, becomes tax-inefficient and lacks liquidity in the short term.
Treat these instruments as medium-term tax-saving instruments, don’t withdraw in the interim and you should be fine, advise financial planners.
