Fixed maturity plan (FMP) are on the same lines that of a fixed deposits of a bank. However, they come with a slight difference. FMPs are debt schemes that invest in fixed-income securities.
- Where do FMPs invest?
The corpus invested in Fixed Maturity Plans is directed into many avenues such as certificate of deposits (CDs), commercial papers (CPs), money market instruments, corporate bonds and sometimes even in bank fixed deposits. The fund manager invests into the above mentioned avenues based on the tenure of the investment. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year. The expense ratio generally varies from 0.25 to 1 per cent.
- Tenure of FMPs
The tenure of the plan depends on the plan and its maturity period. It can range anything from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.
These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.
- Actual return Vs Indicated Return
When compared to bank fixed deposits, the actual return tends to differ slightly from that of the indicated return. As banks print the exact amount expected on the maturity of the plan on the FD receipt.
- Tax Implications
• The dividends are exempted from tax in the hands of an individual investor.
• If the growth in FMP is less than one year, then the returns are combined with income and taxed accordingly.
• If the investment in the growth option of the FMP is for over a year, than either 10% capital gains tax without indexation or 20% with indexation.
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