Mutual fund houses are pursuing retail investors aggressively with their short-term fixed maturity plans (FMPs). Fund houses, which raised money through this instrument, last month lowered the minimum investment limit from Rs 50,000 to between Rs 5,000 and Rs 10,000. The target audience is depositors who park their funds in banks’ fixed deposits (FDs).
For instance, Franklin Templeton and Tata Mutual Fund kept the minimum investment at Rs 10,000. Others, including SBI, JM Financial and Reliance Mutual Fund, have pegged the minimum amount at Rs 5,000.
“We are making FMPs more attractive by bringing down the minimum investment limit. The returns on these schemes are better as well,” said Parijat Agrawal, head (fixed income), SBI Mutual Fund.
As far as returns go, FMPs score over FDs, especially in the short term. State Bank of India (SBI) and ICICI Bank give 7 and 6.25 per cent annualised returns respectively on their short-term FDs, ranging between three to six months. FMPs, launched recently, have indicated (FMPs can only indicate and not guarantee returns) to deliver between 10.25 and 10.5 per cent annualised yield for their three-month schemes.
In the long term, returns from the two investment avenues are almost similar. For one-year FDs, most banks are offering returns of around 9.75 per cent. Some banks, such as ICICI Bank, offer a special rate of 10 per cent annualised returns for deposits of 390 days. Lotus Asset Management, Sundaram BNP Paribas and Birla Sun Life have indicated returns between 10 and 11 per cent.
The tax liability on FMPs is lesser as well. The returns from FD are clubbed with a person’s income. So if a person falls in the highest tax bracket, he will be taxed at 33.99 per cent (including surcharge and education cess) for yields from FD. On the other hand, returns from FMPs in the short term will be taxed at the rate of 14.16 per cent, if the dividend option is chosen.
In the long term, FMPs get indexation benefits. That is, if the FMP is maturing in one year, the investor would be charged 10 per cent without indexation and 20 per cent with indexation. Further if the FMP is for more than a year, the investor would get double-indexation benefits.
This means if the FMP is bought in February 2008 and it matures in May 2009, the investor would get indexation benefits for the financial year 2007-2008 (the year he invested) and 2009-2010 (the year it matures).
Also, there is an option whereby you can shift from one short-term FMP to another through interval funds. For instance, there would be a monthly or quarterly option, in which if you have not redeemed on maturity, the money automatically rolls over to the next tenure.
As far as the risk perception goes, many FMPs during the past two years were aggressively investing in papers of real estate and NBFCs to increase returns. However, with growing concerns over these sectors, they have consciously refrained from such papers in recent times. “FMPs have become more risk-averse, with many of them deciding to stay away from real estate and NBFC papers,” said K Ramkumar, head (fixed income), Sundaram BNP Paribas.
