Fact No.1 : We are in the month of March.
Fact No.2 : Over the last 6 to 9 months, the market interest rates have shot up.
This has created a golden opportunity to earn around 8% p.a. — 'reasonably very safe; 'almost assured' and 'possibly tax-free' — returns over a period of slightly above 3 years.
I am talking about FMPs or Fixed Maturity Plans offered by Mutual Fund Companies.
In case you are not aware, Fixed Maturity Plans are
- Close-ended mutual fund schemes (i.e. like fixed deposits they have a fixed maturity date)
- Which invest your corpus in fixed-income debt instruments only (such as Govt. securities, non-convertible debentures, bank certificate of deposits, commercial paper issued by companies etc.) with ZERO exposure to stock markets
- Enjoy indexation benefit for tax purposes (unlike FDs, which are fully taxable*)
(* except for senior citizens, who are exempt from tax on FD interest, up to a limit of Rs.50,000, w.e.f. next financial year)
Presently, the interest rates on Bank Fixed Deposits are 1-1.5% less than about 8% p.a. expected from FMPs.
Even otherwise, FMPs are far superior to FDs, especially for the investors in the higher tax brackets... with March being probably the best month to invest in the FMPs.
Let's analyze!
Safety
The foremost objective of FD investors is the "safety" offered by the banks.
Are FMPs also safe?
As mentioned earlier, FMPs don't invest in stocks. They invest only in the fixed-income investment products.
Plus, they take care to invest primarily in the highly rated securities — credit rating of at least 'AA' or 'AAA' — issued by reputed companies. This provides a good safety against default, which can be one of the risks affecting the safety of such funds.
Plus, the total corpus is spread across many companies and banks, giving the scheme a wide diversification.
Plus, (for simplicity sake I will skip the explanation) unlike other debt mutual funds, FMPs are not affected by "interest-rate risk" as they have a fixed maturity date.
Hence, Fixed Maturity Plans are more or less as "safe" as the Bank Fixed Deposits.
Assured returns
Unlike fixed deposits, as per the rules mutual funds are not allowed to offer a pre-fixed and pre-decided assured rate of return.
However, as mentioned earlier, the default risk is minimal in such funds. Plus, the interest-rate risk too is minimal in FMPs.
Hence, FMPs will deliver returns which are
(a) in line with the prevailing market interest rates, and
(b) with a high degree of certainty.
Given that presently one can earn around 8% p.a. returns by investing in various bonds, debentures etc. available in the market, FMPs too will almost surely give around 8% p.a. returns (with added advantage of professional management, diversification and of course, lower / nil tax).
Hence, returns from Fixed Maturity Plans are more or less as "assured" as the Bank Fixed Deposits.
Liquidity
Bank Fixed Deposits have a fixed tenure.
Likewise, Fixed Maturity Plans too have a fixed tenure.
Of course, here FMPs are at a slight disadvantage.
You can prematurely close your FDs (with some loss of interest and possibly some penalty too). But you cannot encash your FMPs before maturity. This, however, is not a serious drawback. You can always put only that much money into FMPs, which you may not require on urgent basis.
Hence, illiquidity of Fixed Maturity Plans vis-a-vis Fixed Deposits is not a matter of much concern.
Taxation
This is where FMPs have a huge advantage over FDs.
And, as we shall now see, March being probably the best time to invest in FMPs from the tax angle.
Interest income from Fixed Deposits is fully taxable. Not even a single rupee is exempt from tax. Also, even if the interest is only accrued and yet to come into your hands, you have to pay tax on this accured interest. This creates cash flow issues. Last, but not the least, there is the painful TDS to deal with.
So for investors in the higher tax brackets, investing in fixed deposits is a pretty lousy deal.
Short term capital gains — holding period less than 3 years — from debt mutual funds are taxed just like the fixed deposits. So, from taxation perspective, both FMPs and FDs are the same when the period of investment is less than 3 years.
Long term capital gains — holding period more than 3 years — from debt mutual funds are taxed @20% with indexation benefit.
Hence, most FMPs are launched with a 3+ years tenure.
Now let's consider a simple example, to see how you can save lots of tax with FMPs vis-a-vis FDs. (Note: This is without the March angle.)
Amount invested : Rs.5 lakhs
Tenure : 3 years
Expected rate of return : 8%
Approx amount on maturity : Rs.6.30 lakhs
Expected rate of inflation : 6%
Indexed cost of investment : Rs.5.95 lakhs (considering inflation for 3 years)
Long Term Capital Gains : Rs.35,000 (= Rs.6.30 lakhs - Rs.5.95 lakhs)
Case 1 : You are in 20% tax bracket
Tax on FMP @20% : Rs.7,000
Tax on FD : Rs.26,000 (= 20% * Rs.1.30 lakhs)
Tax Saving : Rs.19,000
Case 2 : You are in 30% tax bracket
Tax on FMP @20% : Rs.7,000
Tax on FD : Rs.39,000 (= 30% * Rs.1.30 lakhs)
Tax Saving : Rs.32,000
Thus, depending on your income tax bracket, with FMPs you can bring down your tax liability by a whopping 73% / 82%.
Why is March so special?
Suppose you invest in Mar 2018 and the FMP matures in Apr 2021.
Hence, your investment time-frame is slightly above 3 years. However, you get indexation benefit for FOUR years!
So the above example gets revised as under:
Amount invested : Rs.5 lakhs
Tenure : 3 years
Expected rate of return : 8%
Approx amount on maturity : Rs.6.30 lakhs
Expected rate of inflation : 6%
Indexed cost of investment : Rs.6.31 lakhs (considering inflation for 4 years)
Long Term Capital Gains : Nil (in fact, it's a loss)
Case 1 : You are in 20% tax bracket
Tax on FMP @20% : Zero
Tax on FD : Rs.26,000 (= 20% * Rs.1.30 lakhs)
Tax Saving : Rs.26,000
Case 2 : You are in 30% tax bracket
Tax on FMP @20% : Zero
Tax on FD : Rs.39,000 (= 30% * Rs.1.30 lakhs)
Tax Saving : Rs.39,000
Thus, depending on inflation, with FMPs in March you can probably wipe out the entire tax liability.
(And, icing on the cake, TDS is not applicable on returns from the mutual funds.)
In plain and simple terms, go for the Fixed Maturity Plans... NOW!!
Fact No.2 : Over the last 6 to 9 months, the market interest rates have shot up.
This has created a golden opportunity to earn around 8% p.a. — 'reasonably very safe; 'almost assured' and 'possibly tax-free' — returns over a period of slightly above 3 years.
I am talking about FMPs or Fixed Maturity Plans offered by Mutual Fund Companies.
In case you are not aware, Fixed Maturity Plans are
- Close-ended mutual fund schemes (i.e. like fixed deposits they have a fixed maturity date)
- Which invest your corpus in fixed-income debt instruments only (such as Govt. securities, non-convertible debentures, bank certificate of deposits, commercial paper issued by companies etc.) with ZERO exposure to stock markets
- Enjoy indexation benefit for tax purposes (unlike FDs, which are fully taxable*)
(* except for senior citizens, who are exempt from tax on FD interest, up to a limit of Rs.50,000, w.e.f. next financial year)
Presently, the interest rates on Bank Fixed Deposits are 1-1.5% less than about 8% p.a. expected from FMPs.
Even otherwise, FMPs are far superior to FDs, especially for the investors in the higher tax brackets... with March being probably the best month to invest in the FMPs.
Let's analyze!
Safety
The foremost objective of FD investors is the "safety" offered by the banks.
Are FMPs also safe?
As mentioned earlier, FMPs don't invest in stocks. They invest only in the fixed-income investment products.
Plus, they take care to invest primarily in the highly rated securities — credit rating of at least 'AA' or 'AAA' — issued by reputed companies. This provides a good safety against default, which can be one of the risks affecting the safety of such funds.
Plus, the total corpus is spread across many companies and banks, giving the scheme a wide diversification.
Plus, (for simplicity sake I will skip the explanation) unlike other debt mutual funds, FMPs are not affected by "interest-rate risk" as they have a fixed maturity date.
Hence, Fixed Maturity Plans are more or less as "safe" as the Bank Fixed Deposits.
Assured returns
Unlike fixed deposits, as per the rules mutual funds are not allowed to offer a pre-fixed and pre-decided assured rate of return.
However, as mentioned earlier, the default risk is minimal in such funds. Plus, the interest-rate risk too is minimal in FMPs.
Hence, FMPs will deliver returns which are
(a) in line with the prevailing market interest rates, and
(b) with a high degree of certainty.
Given that presently one can earn around 8% p.a. returns by investing in various bonds, debentures etc. available in the market, FMPs too will almost surely give around 8% p.a. returns (with added advantage of professional management, diversification and of course, lower / nil tax).
Hence, returns from Fixed Maturity Plans are more or less as "assured" as the Bank Fixed Deposits.
Liquidity
Bank Fixed Deposits have a fixed tenure.
Likewise, Fixed Maturity Plans too have a fixed tenure.
Of course, here FMPs are at a slight disadvantage.
You can prematurely close your FDs (with some loss of interest and possibly some penalty too). But you cannot encash your FMPs before maturity. This, however, is not a serious drawback. You can always put only that much money into FMPs, which you may not require on urgent basis.
Hence, illiquidity of Fixed Maturity Plans vis-a-vis Fixed Deposits is not a matter of much concern.
 |
| Wake Up! Don't miss this golden opportunity to invest in FMPs. |
Taxation
This is where FMPs have a huge advantage over FDs.
And, as we shall now see, March being probably the best time to invest in FMPs from the tax angle.
Interest income from Fixed Deposits is fully taxable. Not even a single rupee is exempt from tax. Also, even if the interest is only accrued and yet to come into your hands, you have to pay tax on this accured interest. This creates cash flow issues. Last, but not the least, there is the painful TDS to deal with.
So for investors in the higher tax brackets, investing in fixed deposits is a pretty lousy deal.
Short term capital gains — holding period less than 3 years — from debt mutual funds are taxed just like the fixed deposits. So, from taxation perspective, both FMPs and FDs are the same when the period of investment is less than 3 years.
Long term capital gains — holding period more than 3 years — from debt mutual funds are taxed @20% with indexation benefit.
Hence, most FMPs are launched with a 3+ years tenure.
Now let's consider a simple example, to see how you can save lots of tax with FMPs vis-a-vis FDs. (Note: This is without the March angle.)
Amount invested : Rs.5 lakhs
Tenure : 3 years
Expected rate of return : 8%
Approx amount on maturity : Rs.6.30 lakhs
Expected rate of inflation : 6%
Indexed cost of investment : Rs.5.95 lakhs (considering inflation for 3 years)
Long Term Capital Gains : Rs.35,000 (= Rs.6.30 lakhs - Rs.5.95 lakhs)
Case 1 : You are in 20% tax bracket
Tax on FMP @20% : Rs.7,000
Tax on FD : Rs.26,000 (= 20% * Rs.1.30 lakhs)
Tax Saving : Rs.19,000
Case 2 : You are in 30% tax bracket
Tax on FMP @20% : Rs.7,000
Tax on FD : Rs.39,000 (= 30% * Rs.1.30 lakhs)
Tax Saving : Rs.32,000
Thus, depending on your income tax bracket, with FMPs you can bring down your tax liability by a whopping 73% / 82%.
Why is March so special?
Suppose you invest in Mar 2018 and the FMP matures in Apr 2021.
Hence, your investment time-frame is slightly above 3 years. However, you get indexation benefit for FOUR years!
So the above example gets revised as under:
Amount invested : Rs.5 lakhs
Tenure : 3 years
Expected rate of return : 8%
Approx amount on maturity : Rs.6.30 lakhs
Expected rate of inflation : 6%
Indexed cost of investment : Rs.6.31 lakhs (considering inflation for 4 years)
Long Term Capital Gains : Nil (in fact, it's a loss)
Case 1 : You are in 20% tax bracket
Tax on FMP @20% : Zero
Tax on FD : Rs.26,000 (= 20% * Rs.1.30 lakhs)
Tax Saving : Rs.26,000
Case 2 : You are in 30% tax bracket
Tax on FMP @20% : Zero
Tax on FD : Rs.39,000 (= 30% * Rs.1.30 lakhs)
Tax Saving : Rs.39,000
Thus, depending on inflation, with FMPs in March you can probably wipe out the entire tax liability.
(And, icing on the cake, TDS is not applicable on returns from the mutual funds.)
In plain and simple terms, go for the Fixed Maturity Plans... NOW!!
