Subhead: Consider investing in FMPs for tax-efficiency and negligible risk
10-Sep-2013 •Research Desk
I want to make a lump sum investment that I would need in June 2015, for my sons education. Which investment options are nearly as safe as bank FD? I am in 30 per cent tax slab.
Venkata Ramanayya Manapragada
No mutual fund guarantees capital protection and appreciation like a bank Fixed Deposit. At any other time we would have suggested you to invest in dynamic bond funds or short term funds, but the last few months India's debt market has been quite volatile.
You should consider investing in Fixed Maturity Plans offered by fund houses. These are a tax-efficient alternative to bank fixed deposits with almost no risk.
FMPs are closed-end funds, which means you can invest in them only through the NFO. You can redeem your investment only when the fixed term is over. The returns are also predictable.
For investors who want to park money for short periods of time, these are a perfect fit.
FMPs invest in instruments that have the same maturity period as that of the scheme. So a 10-month FMP's portfolio will have instruments that have a 10-month maturity while a three-month FMP will have instruments of a three-month 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.
These funds are currently offering a yield of 9.75 to 10 per cent. You get indexation benefit while calculating long-term gains in FMPs, hence the post tax returns are higher than bank fixed deposits. So, you can opt for an FMP which has a tenure similar to your goal.