AMCs introduce new FMPs, should you consider?

Many of the fund houses are coming up with the NFOs in the FMP category, that is, fixed maturity plans. In the month of July 2018, AMCs have launched more than 40 FMPs both in short and long-term tenure. FMPs are the close-ended debt funds which invest in the money and debt market instruments such as T-bills, CPs, government bonds and corporate bonds.

Investors can invest in these FMPs only in the NFO period and they need to hold it till maturity. So FMPs have very low liquidity. These funds seems to be capable of providing returns in the range of 7 to 8 per cent.

The 10-year G-sec yields were high in the last 4 months. The yields have rose by almost 65bps which is one of the positive signs for FMPs. For conservative investors, these are good investment options as these funds are the minimum risk funds. With three-year lock-in, these funds don’t face any redemption till maturity and hence invest in securities whose maturity is similar to the scheme's maturity, thus the interest rate risk is also minimised.

The only risk FMPs possess is credit risks. That is, if the rating for the underlying securities downgrades, then it can erode the returns of the investors. So investors who are currently preferring Fds, a traditional investment option, can definitely consider these funds for investment, but before investing one should always understand the risks involved in it.

In terms of taxes, these funds attract long term capital gain tax (LTCG) if the investment has been redeemed after 3 years, which 20 per cent with the indexation benefit. And in the case of redemption before 3 years, the gains attract short-term capital gain tax which is calculated as per the tax slab of the individual.