Mutual Funds investment plans get popular with a rise in interest rates
Nowadays investors are highly attracted by fixed maturity plans (FMPs) of mutual funds investment plans. Because of very good returns in long-term FMPs, the majority of the asset management companies are coming up with FMPs tenure ranging from 1,080-1,405 days which can provide returns up to 8.5%. After all the taxations and factorization in the indexation benefits, the actual returns come out to be somewhere around 7.4 to 7.9%, which is still better than fixed deposits in banks.
In shortly fixed maturity plans (FMPs) are closed-ended debt funds that for the period of maturity invests in debt instruments. And regarding fund houses, the FMP’s investment objective is to generate returns and protect the capital invested as the schemes invest in debt products with a fixed maturity.
Low risk of capital loss through FMPs
FMPs provides minimized risk of capital loss as compared to equity funds for the investors who don’t want to take risks with their capital because with FMPs the funds are invested in debt products with a fixed maturity.
As FMPs are debt product, therefore, they have negligible interest rate risks as these maturity plan schemes invest the capital in assets maturing on or before the scheme maturity. FMPs only indicates the likely returns to the investors rather than providing the fixed returns of the mutual fund schemes because as per the norms of the markets regulator, a mutual fund cannot provide an assured returns scheme.
Investors should carefully look out for the investment objective and the investment strategy of the mutual fund schemes before purchasing any FMP. After they have completely gone through and understood all these factors, then only they should invest and reap tax-efficient returns.
In the majority of the cases, FMPs invest in deposit certificates, money market instruments, commercial papers and highly rated securities. Fund managers of the fund houses invest in debt instruments as per the tenure of the FMP and that too in such a way that the maturity period of all the policies remains with no pressure at the time maturity. As FMPs only provide investors with an indication of the returns and not the actual returns, the Returns from FMPs depend upon the prevailing rates in the money market.
FMPs are not only great in terms of returns but they also offer better post-tax returns than bank FDs, especially for those in the highest (30%) tax bracket. Besides these FMPs provide indexation benefits, which lower downs the capital gains and thus lower the tax outgo as well.