Amit Gobind is no pushover when it comes to investing in smart products. A keen reader of financial publications and an observer of swinging market indices, the 38-year old banking executive took pride in most of his investment decisions until the time someone asked if he had invested in the latest Fixed Maturity Plans or FMPs. He had just shifted bulk of his investments into term deposits to avoid market shocks despite knowing well that his tax liability would go up. Soon, a flurry of FMP launches happened and put Amit in a quandary - did he miss something here?
Let us explore FMPs and their fundamental differences with FDs.
FMPs typically take advantage of high interest rates prevailing in an economy; hence most funds make loud noises when the situation is conducive, as is the case at present. These plans come with an average tenor of 1-2 years while a few are in the range of 1-3 months as well. Generally considered safe, FMPs are attractive for individuals in the highest tax bracket of 30.90% since the tax rate is just 10.30% if one stays invested for at least a year. A growth plan is an ideal option for plans with a year or more whereas for less than that, one can prefer dividend route as dividends are tax free (after a distribution tax of 15%).
FMPs are debt schemes of a close-ended nature with investments in CDs (Certificate of Deposits) and commercial papers issued by companies (spanning three months to one year or a maximum of two years). So fund allocation is also in debt securities that have similar maturity plan (one year plan invests in securities of one year tenure). On maturity, the fund will exit the instrument and investors can redeem their investments. Though FMPs seem to have plain vanilla and easy to understand features, choosing the right plan could be arduous due to fast closure of schemes and multiple launches under same schemes or series. Also, one has to screen the reputation of the fund house and the fund manager along with