Features of FMPs

• Where do they invest? - FMPs usually invest in Government Securities, Certificate of Deposits (CDs), Commercial Papers (CPs), Money Market Instruments and Corporate Bonds and securitised debt. Depending on the tenure of the FMP, the fund manager invests in a combination of instruments of similar maturity.

  Say if the FMP is for a year, then the fund manager generally invests in papers maturing in one year. An ideal portfolio would consist of a portfolio of ‘AAA’ rated instruments which are prone to a low risk

• Entry / Exit Loads - Typically there are no entry load for investment in these schemes and the exit load in these funds range from 0.5 percent to 2 percent (depending on the time of redemption), so the fund manager has the flexibility to allocate the funds mobilized in line with the investment tenor of the fund.

• Taxation Effect

• Dividend in the hands of the investor is tax-free but the investors will receive the same after deduction of dividend distribution tax.

• Long-term capital gains (investment of more than a year) enjoy indexation benefits. The tax liability is computed using two methods i.e. with indexation (charged at 20% plus surcharge) and without indexation (charged at 10% plus surcharge); the tax liability will be the lower of the two.

• Short-term capital gains are added to the income of the investor and taxed as per his/her slab.

Fixed Maturity Plans (FMPs) vs. Fixed Deposits (FDs)

• Assured vs. Indicative - The defining feature of both FMPs and FDs is that investors know in advance how much return they may earn on maturity. The difference is, while the returns on FDs are assured, returns on FMPs are indicative i.e. on maturity, there is a possibility of the actual returns deviating from what may have been indicated as an illustration to investors at the time of investing.

• Taxation Effect

• In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab (or the marginal rate of tax).

• As far as FMPs are concerned, the tax implication depends upon the investment option – dividend or growth. In the dividend option, the FMP issuer deducts the dividend distribution tax and thereafter there is no tax liability in the hands of the investors. Whereas in the growth option, returns earned are treated as capital gains i.e. Long Term Capital Gains enjoy indexation benefits and Short Term Capital Gains are added to income of investor and taxed accordingly.

• The investor in this example falls in the highest tax bracket

• The 10 % return used in the example for FMP is for illustrative purposes only and not assured and the actual returns may go up or down depending on the market conditions. The Fixed Deposit rate is also for illustrative purposes only.

• In case of FMP; all accretions are assumed paid on maturity

• Investors need to take into account their risk profile and investment objective before considering any investment decision.

• FMPs under various plans / options offer investors competitive and superior post-tax returns vis-à-vis Fixed Deposits; returns offered by them are only indicative and not assured. However investors who are willing to take a little risk can invest in these funds.

  Investors are advised to refer to Scheme Information Document for Scheme specific risk factors before investing.