Should you roll over your FMPs for 3 years?

Base the decision on more than your potential liability under the new tax rules

Fund houses are offering investors in one-year fixed maturity plans (FMPs) the option to roll over their investment for two more years, to reduce redemptions.

They say this would also help investors avoid taxes they would otherwise have paid, by redeeming after one year, under new tax rules.  

Experts believe investors contemplating the extension should also take into account the schemes’ liquidity profile and the change in interest rate cycle during the proposed period of investment, not only the change in tax rules.

The government has proposed to increase the rate of tax on debt funds from 10 per cent, to 20 per cent. Further, the tenure for claiming long-term capital gains has been increased to 36 months from the existing 12 months. These changes are expected to be applicable to existing investments as well.

Fund houses have already begun reaching out to investors for their consent to roll over investments for two more years. HDFC Mutual Fund's FMP 371D July 2013, of a year  and due for maturity on July 30, has asked investors to give their consent by Friday if they want to extend it. If investors do not respond, the default action would be to deposit the money in the investor's account. A similar process is on at other fund houses, say sector officials.

Srikanth Meenakshi, founder and chief operating officer, FundsIndia.com, suggested investors opt for these only if absolutely sure they would not need the money during that period. "Unlike a bank fixed deposit, where you can withdraw your money by paying a penalty, in an FMP you cannot expect any liquidity,” he said.

Jyotheesh Kumar, executive vice-president and business head, HDFC Securities, said fund houses are betting that FMPs will give better returns over a three-year period compared to bank FDs. However, there are competing products which could be a better bet for those with the risk appetite.  

Meenakshi believes in the current interest rate scenario, where rates are expected to remain stable or decline, it is a better idea to invest in open-ended accrual or income funds.

Meanwhile, fund houses are scrambling to retain assets.

“What we need to concentrate upon is whether the asset is at risk due to the change in norms and how to save it," said the chief executive officer of one.

According to executives, FMPs and duration funds (short- term, income and monthly income plans) make up Rs 2.75 lakh crore or just over a quarter of all MF assets. They say they’ll be able to retain assets worth Rs 1.1 lakh crore by rolling over and extending tenures; they think they'll have to lose the rest.

So, should you roll over? Only if sure you won’t need the money for the next couple of years and don’t want to take a guess on interest rates.