Reliance Fixed Horizon Fund - XXVI - Series 7: BUY

If it’s March, it’s the season for Fixed Maturity Plans or FMPs.

March is the time when companies scramble for funds in the money market. This means high yields on certificates of deposit (CDs) and commercial papers (CPs), where FMPs invest.

These closed-end debt funds also usually have tenures of slightly more than a year and enable you to save on capital gains tax by investing at the end of the fiscal. This year, FMPs are particularly attractive because the yield on the 10-year G-Sec is hovering close to its high, at 8.8 per cent. FMPs buy and hold debt instruments. Thus, they are not affected by interest rate fluctuations.

But as companies in their portfolio can default, they do carry credit risk. Hence, it is better to go with funds that invest in top-rated debt instruments.

Reliance Fixed Horizon Fund - XXVI - Series 7 is one such fund that will invest close to 80-85 per cent in A1+ rated CDs and 15-20 per cent in A1+ rated CPs.

CDs are short-term debt instruments issued by banks, whereas CPs are issued by companies. Since the fund will primarily invest in CDs, the risk on this fund is very low. The fund will not invest in instruments issued by companies in the real estate and airline sectors. Avoiding exposure to these ailing sectors is comforting.

Currently, the yield on one-year CDs is close to 9.7 per cent and it is around 10 per cent on CPs. That provides some indication of the fund’s returns, which could be in the 9 per cent range.

While the returns from this fund may be a shade below bank deposits, which offer about 9.5 per cent, for investors in the higher tax bracket, it will deliver better post-tax returns.

Reliance Fixed Horizon Fund - XXVI - Series 7 fund has a maturity period of 374 days and hence gives investors a tax benefit on indexation. That’s not all. As the investment will be done toward the end of the financial year, you will also benefit from the double indexation on capital gains. Say, for instance, you invest on March 25, 2014, when the fund opens. The fund will mature on April 3, 2015.

This product will hence cover three fiscal years — investment year 2013-14, holding period 2014-15 and maturity in 2015-16. Debt funds held over a period of one year attract long-term capital gains tax at 10 per cent without indexation and 20 per cent with indexation. Indexation brings down the cost of your investment by factoring in Cost Inflation Index (CII) as specified by the IT department.

The indexed cost is calculated using the CII in the year the asset is sold, irrespective of whether the asset was held for the full year or part.

In case of FMPs, if you invest in the end of the fiscal and hold it for slightly over a year, the fund matures in the beginning of the third year.

Since the cost is indexed based on the CII for the full year, you get the benefit of double indexation of your initial investment. This makes your returns tax-free.

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