There is a flurry of new fund offers that opened today. Most of these were close ended Fixed Maturity Plans with tenures ranging from 366 days to 840 days, offered by fund houses such as Birla Sunlife, Deutsche, HDFC, IDFC, Sundaram and Tata Mutual Funds. The schemes close in the first week of February. The objective of these schemes is to generate income by investing a variety of fixed income instruments, ranging from money market instruments, G-Secs and corporate bonds. The table below lists the details of these schemes:
Fixed Maturity Plans generate income while protecting capital. From a tax efficiency perspective, FMPs (with tenure of over 1 year) provide better post tax returns compared to Bank Fixed Deposit (FDR). While FDRs are taxed at the applicable income tax slab rate of the tax payer, FMPs are subject to capital gains tax at 10.3% without indexation benefit and 20.6% with indexation benefit. Investors should note that unlike FDRs, FMPs do not provide assured returns, however based on historical data, FMPs have generated pre-tax returns equal to or nearly the same as FDRs.
The graph below illustrates the difference in post tax returns across different income tax slab rates, for an investment of Rs 1,00,000/- in a Bank FDR and an FMP, both offering a pre tax interest rate of 9%. The tenures of both the FDR and the FMP have been assumed to be little over 1 year. While the difference in post tax returns for this period is due to the difference in tax treatment, if the FMP spans across three financial years, the investor gets double indexation benefit on capital gains tax.
The underlying calculations are detailed in the table below: