Attention conservative investors: Invest in FMPs when interest rate is improving

Now, after a long period of two years, the interest rate has started improving. At the same time, the return from the debt mutual funds is going down. So, what should the conservative do at the present juncture? Read this article to know.

Since 2015, the rate of interest was declining. The Reserve Bank of India had been steadily decreasing the rate of interest in almost every quarter. As a result, many debt mutual funds of various categories were giving handsome returns during that period. But since the first quarter of 2018, the interest rate has started improving. The financial experts are unanimous in their opinion that the improving interest regime has started. From now on, the rate of interest will improve (or will remain the same) in every quarter.

As soon as the interest rate has started improving, the return from most of the debt funds has started going down. Some of the debt funds have registered even negative growth during the last six months or since 1st January, 2018. So, the conservative investors who invest in debt funds have become anxious and are trying to find a suitable way for their investment during the current interest regime. This article is trying to find an answer to this question of the conservative investors.

Alternatives before the debt fund investors

As I have already stated that with the beginning up improving interest rate regime, various categories of debt funds including income funds and gilt funds have started giving negative returns or very low returns. The financial experts are now advising debt fund investors to invest in short-term debt funds and in Fixed Maturity Plans (FMPs). In this article, we will discuss about FMPs.

What is FMP

Fixed Maturity Plan (FMP) is a close-ended debt mutual fund. FMP invests only in those financial instruments whose maturity duration is similar to the particular FMP's own maturity. What does it mean? Let us try to understand from the following example.

Let us suppose the maturity of a particular FMP is 1105 days (a little more than three years). As it is a closed-ended fund, it will remain open for a few days for subscription (usually 3 to 5 days). The interested investor would have to invest in that FMP during that particular window of 3 to 5 days. After the closure of the window, no new investment is allowed. Similarly, almost no redemption is possible during the tenure of the FMP. The FMP will, in turn, invest in such financial instruments (commercial papers, corporate bonds, government securities, certificates of deposit, etc.) which are of maximum 3 years duration and would mature just before the maturity of the particular FMP of 1105 days. After completion of the tenure, the maturity amount will be returned to the investors. As there would be no investment or redemption during the entire tenure of the FMP, FMPs give much better return than the Fixed Deposits (FDs) or debt mutual funds of various categories during the rising interest rate regime.

Some FMPs have tax advantages also

FMPs are of different tenures ranging from a few months to little more than 5 years. As FMPs are debt mutual funds, the tax treatment of FMPs is same as of other debt funds. So, FMPs with maturity over 3 years get indexation benefits.

Final few words

FMPs are subject to interest rate risk and credit risk. In the growing interest rest regime, the interest rate risk is addressed. So, the medium-term and long-term investors who are averse to the volatility of equity market can now go for FMPs for a marginally higher return than FDs and other debt mutual funds.

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More articles: Financial advice Fixed Maturity Plan (FMP) Debt Mutual Fund Mutual Funds


Author: Umesh26 Jul 2018 Member Level: Platinum   Points : 2

Few years back FMP products were delivering a good post tax return of 9 to 15%. As they were issued for a period of just more than 3 years they were getting the long term indexation benefit.

During the last 2-3 years they lost their sheen and were providing a lower return in the range of 6 to 8%. Now in the new expected regime in future the returns may again increase and the suggestion of the author for rejigging one's portfolio in accordance of that line of thinking makes sense.

Author: Partha K.29 Jul 2018 Member Level: Diamond   Points : 3

Thanks to Mr. Umesh for reading the article. Now that the interest rate has started increasing, the debt investors must change their strategy. All financial experts think that FMP is much better at this juncture compared to various income funds or long-term gilt funds.

However, it must be stated that in the present interest rate regime, besides FMP, debt investors can also explore the possibility of investing in corporate bonds and NCDs, if they are sure about the credit ratings of the issuing company.

So, in a nutshell, the debt investors must go for FMPs of mutual fund houses, corporate bonds and NCDs issued by reputed companies with good credit ratings.

Author: dipti07 Aug 2018 Member Level: Silver   Points : 2

FMPs are good debt investments for the current market scenario as explained by the author in the article. This a good investment, I believe, even for a short term say 3 months or so. When you are not sure about the utility of a certain amount and do not want to lock it up, short-term FMPs are also a good choice.

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