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Fixed Income

A 10% Return on FMPs, Tax Free!

Fixed Maturity Plans (FMPs) are not spoken about much now, but if you’re looking at getting reasonable tax free returns, consider this:

FMPs invest, typically, in debt that matures in the same term as the FMP. A 1 year FMP typically buys whatever matures in a year. It’s March today and the financial year 2011-12 will end on March 31. There are FMPs that are greater than 385 days – meaning they will effectively end in April 2013.

The tax code (even the DTC) says that if you buy something in one financial year and go past two financial years, you can use an indexation benefit to allow the impact of inflation before you pay tax on your returns. The formula is:

Gain = Sell value – Indexed Purchase value

         = Sell value – Purchase Value* (CII for FY of sale)/(CII for FY of purchase)

The idea here is that you

a) buy now = so your CII for year of purchase is the one in FY 2011-12

b) sell in April 2013, so your CII for year of sale is FY 2013-14

(For more, read: How To Calculate Long Term Capital Gains Tax)

Effectively get both the inflation in 2012-13 and 2013-14 to index. Assuming 8% inflation each year, about 16% returns are totally tax free! Of course, you will make only about 10.5% or so, which means you actually can declare a “loss” of about 5% odd, which you can then adjust against other such long term capital gains (assuming that post indexation there are any gains in other non-equity funds/investments you sell).

There are many actual products that you can buy; FMPs are released with very short buy dates. A fund I’ve been told about – Reliance Fixed Horizon Fund XXI Series 18 – which can only be bought between 12th March and 14th March, and invests only in bank CDs. Don’t worry if you miss the date, they’ll be a new one soon. And most mutual funds are good, in this respect (HDFC, Reliance, Axis MF, etc.)

The 10% net of tax return is way better than a fixed deposit at a bank, where the interest is taxable. A 10% bank FD means a 7% net return for a person who is in the 30% bracket – there is no concept of indexation.

Downsides: you can’t exit earlier, you’re locked in for a year. If interest rates go up, you don’t get any advantage. There’s also the risk that yields can change – I’m just telling you the current market yields, these can go up and down on the date of purchase, which can change returns. They don’t typically change, but who knows. Finally, only choose funds that invest in bank CDs that are at the top of the pile – those are least likely to default. Do not choose those that buy Commercial Paper.

Disclosure: I might buy an FMP next week, if money gets really tight after the advance tax payment (it’s a risk, yields could even come down). But I’m finding the going really good on ultra short term funds (10% odd, still tax free for me) and might need the liquidity very soon, so my decision will change.

Also, I am a registered mutual fund advisor – largely for a friends and family network – so you should know that this info might be biased. (I don’t think so but I’ll let you decide). Finally, note that I’m not being paid directly by any of these funds for this post. They might buy into a third party ad service to advertise on this blog but I don’t have any control over that process.


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  • Sid says:

    It is interesting to know that FMPs can give better returns over FDs. The tip to invest in FMPs that invest in bank CDs and not those that invest in commercial papers is also useful. Thank you for the excellent post.

  • Sarang says:

    Exactly what I was looking for. I have never invested in FMP but was vaguely aware of the double-indexation thing (but was not sure). However, was just wondering why are Fund houses not shouting to sell their FMPs saying ‘Invest right now to reap benefit of double indexation’)!
    Is there a good source to get list of all the FMPs for this month? along with where they invest? [I will google but you are relatively a lot better and quicker source for such an information! :)]
    Thanks for the wonderful blog and charts!
    I wonder how you get all the information! 🙂

  • Ayush Jain says:

    Hi Deepak,
    Thanks for the timely article. I used to invest in FMPs earlier, but stopped after they were not allowed to publish indicative returns – i believe due to SEBI guidelines.
    Couple of qs:
    1. How can we know that FMP is investing in Bank CDs, and not commercial paper ? For example, the reliance series says it can invest in Govt, Securities, and other debt securities, including corporate bonds.
    2. How can we get an idea of the likely return – can we assume returns will be similar to today’s 1-year FD rates ?

  • Mehul says:

    This may not be the right place to put in this request Deepak, but may be this will bring it to your notice immediately being the latest post.
    I had been looking at listed bonds for sometime now. Many of them are offering attractive yields and some are even perpetual (from Tata group companies, mainly). Several bonds have a very high face value and may not make for a viable fixed income investment vehicle for retail investor, but yields are really attractive. What is also interesting is that barring companies with better reputation (Tata, SBI, etc.), several bonds -advertised heavily and pushed by fixed income brokers, are available at discount to their face value (Mudhoot, Religare, IIFL, etc.) and even the short-term ones too, despite attractive coupon rates (this way yield is much higher than coupon rate). Whats happening here? Is the market seeing them as too risky and shunning them despite attractive coupon? Or other reasons playing out?
    With corporate bonds flooding (ok, not exactly flooding, but at least raining) the market, and we the people really not much aware about its dynamics (trading process, risks, how good are they as fixed income vehicles, what parameters to look at while investing and trading, liquidity, etc.), can I request you to do a educative / informative post on it with your take on it? I am sure many readers will be interested and will be benefited.

  • Krish says:

    FMP investment may be good. However I stopped it after I faced redemption problem. At the end of maturity, these fund houses are picking some problem or other to delay the transfer of funds to your account. In my case, the cheque was issued with missing digit of the account number and it got bounced. I had to go abroad at that time and did not get any support when I highlighted the issue from overseas. Had to send a family member several times to sort out the problem. The above all happened inspite of me attaching the cancelled cheque leaf and also opting for ECS payment at the end of maturity. Due to this delay, I have recd the payment only after 3 months of maturity. No interest was paid for the delay. The additional margin that we expect to get on FMPs may be sucked up on genuine/deliberate tricks of the fund houses. The first FMP was the last of mine.

  • Krish says:

    It was HDFC MF

    • Sachin says:

      If HDFC MF is doing this then what to say about other MF Or else is it one off case ?

      • Sam says:

        I would guess this is a one-off case: the plural of anecdote is not data, and attribution to malice is over-kill when it is very likely a goof-up.
        I have invested in multiple FMPs (HDFC and others), through ICICIDirect, and I can’t recall a single instance where redemption was delayed.

        • Yes, I’ve never heard that either, and it’s likely to be a one-off thing. I redeem HDFC funds all the time (though not FMPs) and haven’t had an issue.

  • Sachin says:

    Good writeup and thanks for educating us in simple way. Due to Indexation benefit FMP are much better compared to Bank FD’s, as they are anyways indirect FD’s. Just want some more transparency from funds.
    Thought of to invest in FPM some time ago. Found interesting article to read :

  • sanjay says:

    I invested in Religare FMP (which opened yesterday and will close on 20 March). It is going to invest in Commercial Paper. I came across your blog just now.
    Did I make a bad decision? How risky it is? Have you seen AAA rated CP defaulting?
    I got information about asset allocation of this FMP from following link

  • Regarding: Reliance Fixed Horizon Fund XXI Series 18
    Hi Deepak, you indicated that this fund will return ~10%.
    I checked and yes, it is ~10%+.
    But here is the kicker. I looked at the plan documents (link at the end).
    On page 18, it indicates that the Annual Recurring Expenses of this fund would be ~2%+.
    So isn’t the return really 8%+ or so from this FMP.
    A 8% net of taxes and expenses return v/s 7% for FDs is still better, but it does diminish the allure of FMPs quite a bit, doesn’t it? Would love to hear your thoughts on this.

    • Vijay, I think this is the standard clause for expenses that they *can* charge. However I don’t think they actually charge this much – these are charges at the level of equity funds and no debt fund manager can afford to charge like this. I might be wrong though – but the best way would be to check any of the previous FMPs to check…