Fixed Maturity Plans (FMP) – A brief Overview
Posted by: moneyindia on: March 13, 2007
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.
What is the benefit of double indexation?
Illustration ——–
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. 1,11,267
Less Rs. 1,10,250
Gain 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.
V Sridevi
9 Responses to "Fixed Maturity Plans (FMP) – A brief Overview"
March 26, 2007 at 7:32 am
Hi Pritika Saran,
You can look at any 13months FMP from reputed brands for double indexation benefits. Kotak has a scheme at the moment which will be closing this week. Please read the offer document before investing.
Regards
V Sridevi
Associate Financial Planner
April 2, 2007 at 9:31 am
Hi
Where can I find more details regarding Fixed Maturity Plans (FMP)?
Thanks
Ajay
April 2, 2007 at 1:34 pm
Hello Ajay,
If you can be more specific on the details that you are looking for, we can certainly help
Thanks,
Ganesh
April 10, 2007 at 9:06 am
Hello,
Lets say I purchase an FMP whose indicative yield is 10%. My tax bracket is the highest i.e. 30% +
What will my net income after taxes be after the FMP matures for the following cases:
A) I selected growth option AND
1) FMP duration is less than 1 year
2) FMP duration is more than 1 year
B) I selected dividend option AND
1) FMP duration is less than 1 year
2) FMP duration is more than 1 year
Thanks in advance!
Ab
April 26, 2007 at 2:46 pm
hello sirs,
I am an NRI. I have started business in India. Now i need money for the same. Earlier i was having nri deposits here and i took OD facility on that. Now as per new rule RBI does’nt permit for NRI ( AS HAS TOLD BY BANK) So now bank is suggesting me to go for FMP and then take loan against that.
1> Would u suggest me for this FMP/OD or u have some better idea for me.
a> If YES- i go with FMP then what return i can fatch in net / gross.>.
b> How can i protecy my $/ rupee value exchange.
c> against my fmp, what % of interest i need to pay to bank.
Can u help me., if yes, pls email me ur contact no.S
2> Suggest me some better idea if possible.
I need my funds to be invested here on repatraitable basis.
tks
Waiting for ur quick reply
Ricky
May 1, 2007 at 7:08 am
Hi Ricky,
FMPs will give a return of 0.5 to 1% greater than FD. You can very well pledge your FMP for your loan with any bank. But they will charge an interest of +2% than your FMP return. This is very simple. That is their margin. Whatever may be your return on FMP, you will end up paying extra 2 to 3% as interest and it may vary from Bank to Bank. You may also get some offers for your other deposits.
Before going in for any loan against your financial asset…….
Your liability is Bank’s asset in their balance sheet. Decide your FMP investment separately as banks do not give the whole picture.ex, HDFC bank suggests mostly HDFC MF FMP and the likes. They promote their brand first. You may want to compare the yields of different FMPs available at the time of your investment. Make an informed decision.
$/Rs value can be protected with hedging. For retail investors, banks may not offer this
service. You can check with your bank.
If you need any clarification, you can call me @98414 28055. I am in Chennai, India.
Regards
V Sridevi
May 27, 2007 at 9:05 am
A question for V Sridevi
To what extent and how offen have FMP actual returns have lagged Vs assured returns.
- This is critical question to answer!
Because Bank FDs such as ICICI 5Yr Tax saving FDs are offering 9.5% p.a. (compounding quaterly) assured returns.
Now if one considers investment in FMPs, one has to bear in mind the risk of deviations in returns. (this risk will tend to dilute the benefits like indexation and lower tax rates)
So the question that’To what extent and how offen have FMP actual returns have lagged Vs assured returns.’ – is crutial
Can you respond pls, V Sridevi
July 1, 2007 at 11:04 am
Dear Sir or Madam :
I am NRI, have fixed Rs. Deposits in IOB, can i transfer my deposit amout on Maturity ?. Do I need to pay any tax on interest amount ?. What is the minimum and maximum period of plan and does IOB have FMP scheme ?. What is the interest amount ?
Rakesh
Leave a Reply
- Vinay: Hello, I think you have done a good job of comparing ULIPs and MFs. I see that you have missed a very important point which could work out as the d
- Manan desai: Dear All, I love all above regarding term insurance + MF. But my idea is do we have courage to forgot our term insurance's money in case of
- Suresh: I need to understand the difference dividend reinvestement and growth
Blog Worth
My blog is worth $1,693.62.
How much is your blog worth?
March 26, 2007 at 3:59 am
Can you suggest some ongoing FMP’s