FMPs, are the equivalent of a fixed deposit in a bank, with a little difference. The FMP’s returns are only indicated and not ‘guaranteed’, Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.FMPs are debt schemes, where the corpus is invested in fixed-income securities.
Where do FMP’s invest ?
FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds and sometimes even in bank fixed deposits. Depending on the tenure of the FMP, the fund manager invests in a combination of the above-mentioned instruments of similar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year.
The expense ratio, generally varies from 0.25 to 1 per cent.
Tenure of FMPs‘
The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.
These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.
Actual return Vs Indicated Return
The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.
Have a look at the list of closed ended FMP’s , and there returns : http://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp
Dividend : Tax-free in the hands of the individual investor.
Investment in growth option of the FMP for less than a year : The gains are added to the investor’s income and taxed at the investor’s slab rate.
Investment in the growth option of the FMP for over a year : Either 10% capital gains tax without indexation or 20% with indexation.
What is indexation benefit?
The finance minister has been generous enough to recognise that inflation erodes the real value of any investment. So every year, he comes out with an inflation index based on the prevailing rate of inflation. The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent.
To understand more on indexation, Read this
FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they are almost risk free (remember almost) .
If they really give better than returns then FD’s and practically as safe as FD’s why don’t people invest in these ?
Ans : No awareness among people and they less risk taking attitude