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While retail investors are overjoyed with the sharp rise in the stock market through the past three months, even their debt portfolio has done well. Many would have received a lump sum from their 13-14-month investments in fixed maturity plans (FMPs).
Given the sharp rally and the rosy outlook for the stock market, they will be wondering whether to use the proceeds to invest in stocks or mutual funds, or continue investing in FMPs, which are close-ended debt schemes with a fixed maturity date; these invest in debt or money market instruments. Before opting to change an asset class, it is important weigh the pros and cons. Kartik Jhaveri, director, Transcend Consulting, says: “Since investors put money in FMPs for double indexation benefits, they should reinvest the amount in another similar-tenured scheme. If their financial situation has changed during the year, they can look for other instruments.”
A major advantage of investing in FMPs, even for slightly more than 12 months, is there are double-indexation benefits. That is, if you had invested in a scheme in March 2013 and the scheme matured in April 2014, there would be inflation-indexation benefits for two years—-2012-13 and 2014-15. Without the benefit of inflation indexation, the tax rate applicable is 20 per cent; in case of inflation indexation, it is 10 per cent.
Hemant Rustagi, chief executive, WiseInvest Advisors, feels it is important to stick to the existing asset class. “Since the time horizon of an FMP investor is one-two years, it is better he stays with the same instrument. Moving to an asset class such as equities will mean increasing the tenure.” Currently, one-year FMPs are offered at 9-9.5 per cent.
You could also look at short-term debt funds or accrual funds. However, Rustagi does not recommend investing in funds that have a long tenure of five-six years on maturity, due to uncertainty in the interest rate regime. If your financial situation has changed, meaning, if there are new goals (three-five years away) you wish to save for, you could take the equity route. For instance, if you wish to save for the initial instalment of a house, a foreign trip or education of children, use the proceeds to invest in an equity scheme, says a financial planner.
Since the decision involves changing asset classes, one should go through the asset allocation rigmarole; if profits in an asset class can be shifted to another, do it. If asset allocation of, say, 60 (in equities) and 40 (in debt) has become 50:50, it will be sensible to take out 10 per cent from debt and put it in equities. This way, an investor will be able to maintain the prescribed asset allocation. Sometimes, especially in a bullish equities market, it is important to reduce portfolio risks. Jhaveri feels if you are tempted to change the asset class despite no pressing need to do so, opt for monthly income plans that have 80 per cent in debt and 20 per cent in equities. “This way, you will able to participate in the rally to some extent,” he says. Retail investors tend to react too aggressively to rallies and corrections. It’s best to temper your approach.
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