FMP

Fixed Mature Plan. A good alternative as market is crashing. and more tax efficient than FDs

Min Inv : 5000

Min Duration : 3 months

No. of scheme in 2008 : 800

44k crore collected by FMPs in '08

With the recent equity market volatility and rising inerest rate, it is time to think to have an appropriate balance between equity and fixed income instruments consistent with one’s risk profile and time horizon of the need. Fund houses float new FMPs in the month of March so that an investor can avail double indexation benefits with 14-15 months plan.

Example of how it works

Let us assume Mr A invests Rs. 1,00,000 in fixed maturity plan and Mr B invests the same amount in fixed deposit providing a return of 10.40% . We assume both Mr A and Mr B are in highest tax bracket. Now the tax is calculated at the time of maturity on the gains. The returns made thru FD would be taxed at 33.66% (assumed at max tax rate). In the case of FMP, Mr A can adjust his initial investment against the cost inflation index. Assuming that inflation index is 1.05 for the two years, the value of his initial investment under taxation would be Rs. 1,10,250 (1.05*1.05*100000 = 110250) at the end of the period as against Rs. 1,00,000 which was his initial investment
At 10.40% pa, Mr A ’s maturity value is Rs. 1,11,267Less Rs. 1,10,250Gain on paper for Mr A, is Rs. 1,017 for which Capital Gain tax @ 22.44% will work out to Rs. 228/-
In case of Mr B who invested Rs. 1,00,000 in Bank FD at 10.40% pa maturity value will be same as Rs. 1,11,267/- At the highest tax rate of 33.66% Mr B has to pay 33.66% on the gain of Rs. 11,267/- which will work out to be Rs. 3,792/-
Having said this, FMPs are not guaranteed return products and do not put all your nest eggs in one basket. FMPs will invest in bonds and hold them till maturity, it is possible to get an idea of indicative yield on FMPs. But the actual yield depends on the date of deployment. Currently all 1 year FMPs are expected to yield around 10.25% pa with indexation benefits.