I am a risk averse investor in the highest tax bracket with most of my investments in bank fixed deposits. Three months ago, I learnt about FMPs and have moved a lot of my investment from bank FDs to FMPs. Lately I am realising that FMPs are unable to collect as much investment from investors, as was the case three to four months back. What is the reason for this? Can I still expect better post-tax returns with FMPs compared to FDs? Are FMPS safe?
— Sanjay Sharma
There is nothing wrong with fixed maturity plans (FMP) as an investment instrument. The flow of money into a category of funds is determined by several factors such as prevailing interest rates and economic environment which can change the investment preference amongst investors. This should not bother you.
Typically there is an interest to invest in FMPs in a rising interest rate scenario. But, with expected interest rate cuts, investors are opting for other opportunities such as gilt funds and income funds that have found a higher flow of investments in the past two months. FMPs are not completely safe as they carry credit as well as interest rate risk like other debt funds but till date none of the FMPs have defaulted. Regulations have resulted in FMPs becoming closed-ended instruments, which can be redeemed only on maturity because these are investments in debt papers that have the same maturity as that of the FMP.
This article was originally published on February 15, 2013.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
