Mutual Funds

Fixed maturity plans versus deposits

K. VENKATASUBRAMANIAN | Updated on November 15, 2017

FMPs can be risky, while bank FDs are almost risk-free but aren't as tax-efficient.

I am 31 years old and am investing in a systematic investment plan (SIP) for retirement. I am holding the following funds, and would need your expert advice: DSPBR Top 100 and IDFC Premier Equity — Rs 4000 each. HDFC Balanced and HDFC Equity — Rs 2000 each. Rs 5000 in ICICI Pru Focussed Bluechip, and Rs 3000 in IDFC Sterling Equity. I have also invested in a few Fixed Maturity Plans (FMPs) spanning 370 days to three years, and would also like to know if investing in FMPs in the current scenario is advisable, when compared with a bank deposit.

— Chandrasekar

It is good to note that you have started early enough towards investing for your retirement. If you continue to invest Rs 20,000 in mutual funds every month for the next 24 years, and earn a conservative 12 per cent annually, you will have a corpus of around Rs 3.3 crore. This, assuming you will retire at 55.

Increase the investment in IDFC Premier Equity to Rs 5,000. You can exit IDFC Sterling Equity, as IDFC Premier Equity follows a similar mandate and has a longer and stronger performance record. Continue with ICICI Pru Focussed Bluechip fund. HDFC Balanced has a sound performance record during the long term. Invest Rs 5,000 in HDFC Equity, a multi-cap fund with a large-cap bias. With these three funds, you will have exposure to mid-, large- and multi-cap funds. Since you already have a large-cap fund in ICICI Pru Focussed Bluechip, you can consider switching from DSPBR Top 100 Equity to Quantum Long-term Equity or UTI Opportunities, both of which have a strong performance record for the past 5-6 years and are multi-cap in nature.

Review your portfolio once a year and rebalance it to add new funds or weed out laggards. Coming to the second part of your question on FMPs, these are more efficient on the tax front, provided: such instruments are held for a period in excess of one year and you happen to be in the 30 per cent tax category. Long-term capital gains attract a tax of 10 per cent without indexation, and 20 per cent with indexation. Short-term gains are clubbed with your income and taxed in the appropriate range. This may change if the direct tax code is implemented.

But FMPs can be risky, as some of the fund houses tend to take exposure to debt instruments of companies that don't have high credit rating. Also, the initial rates that they indicate are not necessarily assured. Bank Fixed Deposits (FDs), however, are almost risk-free, but aren't as tax efficient, since interest is clubbed to income and taxed accordingly. There are some banks that offer FD rates of 9.25-10 per cent for terms as long as 10 years. It should be your risk appetite and post-tax returns that should decide.

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I wish to invest regularly on a monthly basis for the long term in balanced funds. Please suggest good funds.

— Vinay Gupta

Investing regularly is a good financial habit.

If you are a first-time investor to mutual funds, starting off with balanced schemes is a good idea.

But you must note that if your investment horizon is long term (as you have stated), which we assume is at least 5-7 years, you should consider large-cap funds such as Franklin India Bluechip or HDFC Top 200, to generate higher returns.

But if you have limited risk appetite, you can consider investing in HDFC Prudence, DSPBR Balanced and Birla Sun Life'95 fund.

Published on February 25, 2012

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