What are FMPs ?

by khalid on 25/02/2011 · 0 comments

FMPs (Fixed Maturity Plans) are schemes that invest in fixed income instruments like certificate of deposits, commercial papers, money market instruments, corporate bonds, debentures of reputed companies or in securities issued by government of India and fixed deposits selected by the fund manager. FMP investment is 100% Equity-Free. FMP is a fixed tenure, debt investment instrument. The basic objective of a FMP is to generate steady returns over a fixed period. Thus, investors are assured of returns if they stay invested in these products for the entire period.

Since these products are of different maturities, investors have the option of buying schemes that suit their requirements. These have lower risk of capital loss due to their investment in debt and money market instruments and are least exposed to interest rate risk as the fund holds the instruments till maturity getting a fixed rate of return. Here, fund managers primarily invest in AAA, P1+ or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved.

The beauty of FMP lies in it Tax Efficiency, which makes it better over FDs. While FDs are taxed at the tax rate applicable to the individual (which could be as high as 30%), FMPs which are held for more than 12 months enjoy the advantage of being taxed at 10% (without indexation). This makes the post tax yield of FMPs more attractive than FD. For example if a guy invested Rs 50,000 in an one year FD and Rs 50,000 in a one year FMP. He will get an amount at maturity of Rs 54,275 on the FMP while the FD would give him Rs 53,325 post tax.

All the big and reputed AMCs like Reliance, ICICI Prudential, HDFC, SBI, Franklin Templeton and Birla use to come up with there different FMP schemes time to time.

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