FMP Season is Here Again | Value Research The instability in bond returns will continue, making fixed income funds the best choice for stable and tax-efficient returns...
First Page

FMP Season is Here Again

The instability in bond returns will continue, making fixed income funds the best choice for stable and tax-efficient returns...

Unlike equity investors, for fixed income investors stability and predictability is at least as important as returns if not more. The recent turmoil in the bond markets--and the resultant shockwaves in fixed-income mutual funds has made investors think twice about such funds. Going forward, no one foresees any kind of smoothness in the returns of these types of investments. India is in for a period of macroeconomic instability and there's no telling when and what kind of shocks may run through the bond markets again. Traditionally, in this kind of a situation, bank fixed deposits are the obvious choice.

However, for investors who like stability, as well as high post-tax returns, the best choice is actually a type of fund called the Fixed Maturity Plan or the FMP. Fixed term funds make excellent (and far more tax efficient) substitutes for bank deposits. FMPs are closed-end funds, so they limit liquidity. Investors can invest only during the NFO and can redeem only when the fixed-term is over. The return on them is also predictable. Before the crisis, fund companies used to offer an 'indicative' return. This has now been banned by SEBI, but investors get enough clues about exactly what to expect (9.75% to 10% currently). Unlike many other type of funds, FMPs' return expectations have a basis in reality. FMPs invest in debt paper with the intent of holding them to maturity. This means that regardless of any variations in interest rates and the resulting impact in the market value of the bonds, the actual returns that are realised are known.

Of course, since you can invest in FMPs only when they are launched, wouldn't availability timed to your needs be a problem? Not quite. As a fund analyst at Value Research pointed out to me a couple of days back, as soon as the circumstances have made FMPs useful a flood of them have been launched!




Other Categories