Fixed maturity plans, or FMPs as they are popularly called, are close-ended funds with a fixed tenure and invest in a portfolio of debt products whose maturity coincides with the maturity of the product.
The primary objective of an FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years. FMPs are effectively like bank fixed deposits, but one that has a lower tax incidence.
The advantage of investing in FMPs is that they have less risk of capital loss than equity funds due to their investment in debt and money market instruments. Apart from this, FMPs are not affected much by interest rate volatility when held till maturity. The return on these funds is indicated and is close to the actual returns. If you are not a risk-free investor and look for an assured income, this is the right option for you.
TAX BENEFIT ON HOME LOANS
I am taking a home loan for my house which is being constructed by a contractor. Can I get tax benefit on this home loan?
Yes, if you are servicing a home loan, you would get a benefit on the principal amount being repaid under Section 80C (overall limits Rs 1 lakh). But you also get a tax exemption on the interest being paid on the loan under Section 24. Under this section, the limit is Rs 1,50,000 in one financial year.
INVESTING IN ARBITRAGE FUNDS
I have always been interested in arbitrage funds but have not been able to figure out a good fund. Could you please suggest a good fund in that section? I do not trade in futures and options, so is there any MF which can provide me exposure to that segment?
The answer to your second question is no. A mutual fund is not the route for trading in the future and options market. If you really wish to participate in the derivatives market then be prepared to handle the risk involved.
Coming to your first query, an arbitrage fund aims to take advantage of the arbitrage opportunities between the cash and the futures market to generate fixed income. The arbitrage is sought by taking advantage of the mismatching of prices between the cash and derivatives market.
If you are a risk averse investor and want to stay clear of market volatilities, an arbitrage fund is the right thing for you. You can choose among funds like JM Arbitrage Advantage and SBI Arbitrage Opportunities fund.
DEBT FUNDS & MIPS
I am a senior citizen, aged about 68 years. I wish to invest in some good debt Instruments instead of Bank FDs or GoI Bonds to have better returns as well as tax savings. Please advise me if I should invest in MIPs,debt funds or fixed term funds for a period of 3 to 5 years. I already have some (15-20%) investment in equity diversified funds & equity linked saving schemes.
If you have an investment horizon of three to five years, you can consider investing in a five or four star rated medium term debt fund or an MIP.
An MIP is a debt-oriented fund with a small component of equity. It helps the investor to make equity gains at the time the market is bullish. If you can bear a small element of risk and are looking for long term investment then an MIP is a good option. Also, since you are 68, it does make sense to lock-in funds in instruments where the risk element is lowest and the capital is not under any danger.
However, if you want to avoid any kind of risk, then you can choose among the well performing debt funds like Kotak Flexi Debt and Birla Sun Life Income or ICICI Prudential Long Term.
TAX LIABILITY ON MF DIVIDENDS
I have placed a part of the funds I received on retirement into three balanced funds, namely Kotak Balance, HDFC Prudence and SBI Magnum Balance for a long span of five years or more. I have opted for the dividend-payout option. Recently I received dividends from the above mentioned funds. I want to know the tax liability on the dividends received. Also tell me the Income Tax implications on Debt Funds.
The dividend income that you have received under the dividend payout option of the funds will not have any tax liability, since as per existing tax provisions, dividend income of mutual funds is tax free in the hands of the investor. In this case since all the three funds held by you are equity oriented funds, there will not be any tax liability on the dividend income received.
However, this is not to say that there is no tax levied at all. In case of dividend on debt funds, the mutual fund c`ompany has to pay a dividend distribution tax of 12.5 per cent. This tax is paid out of the profits/reserves of the mutual fund scheme declaring the dividend. Therefore, though the investor may not feel the impact of the tax, it is indirectly borne by him only.
SELECTING MID-CAP FUNDS
I have been investing in four mid cap funds: Sundaram Select Midcap, Magnum Global, HSBC Midcap and Reliance Growth. I would like to remove two of these funds from my portfolio, to decide which I need your advice. Needless to say, I look at the funds as long-term investments. Please suggest.
If you really wish to cut down your investment in mid-caps from four to two funds, you should hang on to Reliance Growth and Sundaram Select Midcap while saying goodbye to the other two funds, that are, Magnum Global and HSBC Midcap.
When the four funds are compared on the basis of their returns and ratings, Reliance Growth and Sundaram Select stand way ahead. Both these funds are Five Star rated funds whereas Magnum Global is a four star rated fund and HSBC Midcap is not rated yet.
In terms of returns for a one-year, three year and five year period as well, the funds have put up a better performance. Reliance Growth has offered the highest returns in all these periods followed by Sundaram Select Mid cap. This makes them preferable options compared to the other two funds in your portfolio. When cutting on mid-cap funds, keep the best and lose the others.
