The Hindu Business Line : FMPs losing out to bank deposits?

Fixed maturity plans, which were hugely in demand till recently, are suddenly not so hot any more. Other debt products, and, certainly, bank deposits, seem to be regaining their appeal insofar as a large section of the market is concerned. The situation calls for a fresh look at the FMP segment, especially with regard to the products that are now in place and the ones that are likely to be rolled out in the near future.

Mind you, it is not that the FMP universe is completely devoid of any charm. It is just that some of these plans appear to be losing their edge, at least for certain quarters. The latter, as investment circles point out, are taking to time-tested savings devices (read: deposits) with the kind of gusto that was not seen in till a couple of months ago.

Before we move any further on this, let us quickly do a recap. What are FMPs really? Simply put, these are funds with a specified maturity date, offering returns comparable with fixed income instruments. Tax efficiency is their hallmark. And, as a certain fund house puts it, these hold fewer concerns on principal protection, given the fact that the underlying instruments are of at least investment grade.

No guarantee

Incidentally, those who may be looking at investing in FMPs should know there are no guarantees - that is, these plans do not come with guarantees of principal (or certainty of returns). These, therefore, are different from the deposits offered by banks.

Let us at this juncture consider the tax efficiency angle. Your takings from investment in FMPs, if held for over a year, will lead to long-term capital gains. You will then have the option of choosing between 10 per cent tax without indexation and 20 per cent tax with indexation. Indexation benefit will allow you to lessen the extent of capital gains to be taxed by fine-tuning it for inflation. You can calculate long-term capital gains by multiplying the amount invested by the inflation multiple; then this inflated indexed cost is deducted from the proceeds realised at redemption. The extent of your gains will get adjusted - and so will the tax liability.

Now, fund houses tend to point out that FMPs are quite investor-friendly. This is true, provided you are eyeing returns over a specified period of time. These have to compare favourably with taxable fixed-income instruments. Incidentally, it will pay to remember that your post-tax returns may be higher than in other taxable alternatives and bank deposits.

FMPs, as we know them, have pre-determined tenures, mostly ranging from 1 month to 36 months. These can invest in debt securities of various hues, including paper issued by the government of India. Typically, an FMP will invest in instruments where the maturity matches the tenure of the plan itself. Trading in these instruments, after all, may subject it to interest rate risks. Therefore, it makes sense to hold the securities till maturity.

Before we end, let us point out that FMPs seem to be unstoppable, given the sheer number of draft offer documents that are being sent to SEBI for approval. Some of the more recent filings have been done by HDFC, Birla Sunlife, Standard Chartered and ABN Amro. Those who may be considering allocating part of their surpluses to these plans should have a fair idea of the kind of post-tax returns they may secure.

Feedback may be sent to nilanjan@thehindu.co.in

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FMPs losing out to bank deposits?