If you are looking for relatively safer and low-risk investments in the current market scenario, look no further than an FMP (Fixed maturity plan). An FMP or a Fixed Maturity Plan, is similar to Fixed Deposits (FD).
What is FMPs or Fixed Maturity Plan?
In India, the default investment advice is an FD. Ask your parents, grandparents, and even some of your peers/friends/colleagues about avenues for investments and chances are that they will tell you “FD mein daal de” (Put your money in an FD).
A fixed deposit is a banking product where you park excess money at a fixed interest rate for a fixed period of time. At the end of that period, you will get back your principal plus the returns as per the interest rate on that investment. Simple. Safe.
However, the interest received on your FD is subject to income tax and will be taxed as per the income bracket that you fall under.
Is FMP a good investment?
FMPs, on the other hand, are subject to long-term debt mutual fund taxation. Here, the tax paid is lower at 20% with indexation benefits when the FMP is held for a period of three years or more.
Indexation essentially means adjusting the initial investment for inflation. Inflation causes prices of goods, services, and assets to increase every year which means that the value of money also decreases.
Similarly, your investment amount also decreases in value. When you invest Rs 1 lakh in 2016, it will not retain its value at Rs 1 lakh in 2019. The value would have decreased. This change in value is calculated using a cost inflation index value which is announced each year by the government. This change in value is calculated using a cost inflation index.
Suppose you invest Rs 1 lakh in an FMP in June 2015 when the cost inflation index value is 254. The FMP matures three years later in June 2018 when the cost inflation index value is 280. At the time of maturity, the Rs 1 lakh invested would be valued at Rs 1.10 lakh, after adjusting for inflation.
The tax on the FMP is then arrived at using Rs. 1.10 lakh as the purchasing price, thereby reducing overall tax.
FMPs also have a lock-in feature whereby you lock your investments at a fixed rate for the tenure of the investment. This means that in a three-year FMP, you cannot withdraw the money before the end of the investment period.
One thing to remember here is that FMPs carry credit risk. So while choosing FMPs look at the risk-level in that FMP. If you are risk-averse then invest in an FMP that takes higher exposure to high credit quality papers while for those who don’t mind some risk, can invest in FMPs that have higher exposure to lower credit quality papers.
FMPs with higher credit papers tend to give comparatively lower yields compared to FMPs with lowers credit papers. This is because yields offered by a paper are inversely proportional to the credit rating of the paper.