FMPs in focus as investors rush for tax sops

Fixed maturity plan (FMP) launches, which had slowed down since the end of 2008, have again gathered steam with mutual funds rushing to meet investors’ demand for such plans ahead of the financial year end for the tax incentive FMPs provide.

Another trigger for launch of these schemes is expectation that short-term rates will rise, as market participants anticipate monetary policy tightening.

“One reason for FMPs being launched is of course double indexation. Also, going forward, Reserve Bank of India is likely to increase rates, which will lead to rise in short-term rates,” said Y Jawahar, vice-president and distribution head, Mata Securities.

Today, three-month certificates of deposit were quoted 3.45-3.7 per cent, while similar maturity commercial papers were quoted 3.9-4 per cent.

“FMPs are giving higher yields on your investments if you keep till lock-in period that is why at this point of time you have so many in the market. So if an liquid plans investor wants higher yield, he can go for FMPs,” said Lakshmi Iyer, head-fixed income and products, Kotak Mahindra Mutual Fund.

Kotak Mahindra Mutual Fund launched an 18-month fixed plan on December 9. The new fund offer closes for subscription Tuesday.

So far in the current month, around seven fixed plans have been launched.

FMPs are essentially close-ended debt plans that seek to lock in investments in short-term papers.

Many other mutual funds are planning to offer fixed-tenure plans in the near future.

“We are also planning to launch a fixed plan over one-year by December-end in as investors are likely to flock in to such schemes due to double indexation benefits,” said a marketing official from a private mutual fund.

Double indexation gives investors the advantage of indexing investments to inflation for two years, while remaining invested for a period of slightly over one year.

This is done if investors put in money just before the end of a financial year and redeem immediately after the end of the next financial year.

Depending on the extent of gains in the scheme and the inflation index, the tax liability could be lowered by availing double indexation.