Fixed maturity plans out of favour as tax benefits go away

Fixed maturity plans, a popular debt mutual fund (MF) product, seem to be out of favour with investors following changes to the tax structure and markets regulator Sebi expects that lesser number of schemes would be filed in the remaining period of 2015-16.

Besides, increase in risk appetite of investors too played a crucial role in making FMPs less attractive.

The Securities and Exchange Board (Sebi) said that FMP as a product has become unattractive because of the new tax structure and it is expected that a lesser number of schemes would be filed for the remaining period of 2015-16, as per the mid-term review of its budget estimates for the ongoing financial year.

In 2015, about 150 FMPs were launched, while this year, only two schemes have been filed so far with capital markets regulator Sebi for its approval.

From April 1, long-term capital gains tax on debt- oriented MFs has been increased to 20 per cent from 10 per cent. Besides, the period of holding in respect of long-term debt fund units has been raised from 12 months to 36 months.

"I believe that FMPs have become less attractive among MF houses as fewer AMCs are launching such products because of lower demand among investors for such schemes. This lower demand can be attributed to changes in taxation structure," Quantum Mutual Fund Chief Executive Officer Jimmy Patel said.

Echoing a similar view, Motilal Oswal Financial Services Head (Private Wealth Management) Ashish Shanker said: "Earlier one considered a one-year period for investment in debt. There were changes introduced with respect to increasing the time period for considering the gains made from an investment under long-term capital to three years.

"This accompanied with locked-in nature of the product has resulted in a lesser appetite for this product."

He further said that domestic equity has fared well resulting in clients' willingness to take risk, which too has played its own role in dampening the appetite. The same is reflective in the gross monthly sales of equity MFs.

FMPs, which are close-ended debt schemes with a fixed maturity horizon, mainly invest in specified duration instruments like bank certificates of deposit (CDs) and commercial papers (CPs), which are issued by companies and usually have tenures of a few months or a year.

UTI MF Head of Products R Raja said that some of the fund houses have stopped launching FMPs and 80-90 per cent of business comes from institutional investors rather than retail investors.