AMFI Registered Mutual Fund Distributor | SEBI registered Investment Adviser
FSM LOGO

                    


titl_l_gif
Research
title_r_gif
Share | Email Print more
Capture High Yields - Invest In FMPs
July 26, 2013

Good time to invest in FMPs


Author : iFAST Research Team



Fundsuper Mart : FMPs Capture High Yields
 

 

Last week, when the Reserve Bank of India (RBI) came out with measures to manage exchange rate volatility, we released a brief note recommending Fixed Maturity Plans (FMPs) of 1-year time horizon to investors who did not want to take any risk. Those open to some volatility were advised exposure into short-term debt funds or dynamic bond funds.

In addition to the measures taken last week, the central bank came out with additional measures on July 23, 2013, aimed at containing the volatility in the foreign exchange market. This means that the liquidity situation will become tight which, in turn, implies that banks will borrow from Reserve Bank of India (RBI) at higher rates, further translating into an increase in short-term rates. In this scenario, FMPs are an attractive option to investors with a time horizon of 3 months to 1 year.

 

 
  Taxation    Returns

For a moment, let us assume that a 1 year FMP generates the same return as a 1 year FD. In that case, the post-tax yields delivered by both these instruments are outlined below.

Particulars FD FMP
Amount Invested 50,000 50,000
Rate of Interest / Yield 9.00%* 9.00%
Tax Rate 30% 10%
Post Tax Yield 6.30% 8.10%
Post Tax Return 3150 4050
Amount on Maturity 53150 54050

Source: iFAST Compilation

 

A study of the recently closed FMPs reveals that a portfolio of these funds is mostly concentrated in the CD and CP space.

Consider a Hypothetical case: If I was a Fund Manager and bought the following instruments then the yield from these will be as given below.

Debt Instruments Current Yield on Papers(%)
3 Months CDs 10.79
12 Months CDs 10.26
3 Months CPs 11.13
12 Months CPs 10.88

Souece:iFAST Compilation. Data Compiled as on July 25, 2013

 

     
 Benefits of FMPs     Conclusion

FMPs are generally used by large investors and companies as an alternative to Fixed Deposits (FDs). This is due to the added advantage of tax efficiency and better return prospect.

 

 

A combination of the above mentioned factors makes FMPs our recommendation to investors as an alternative to FDs.This will ensure that the investors capture high yields in the current scenario.

*9.00 % is the current rate on an FD from Karnataka Bank for tenure of 1Year.    

 

Certificate of Deposits are financial instruments issued by bank to meet short-term requirements.

Commercial Papers are instruments issued by Corporates to meet their working capital requirements and other short-term needs.

 

 

To invest in FMPs Click Here

 

DISCLAIMER:- iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice.
 

Comments (0) | Comment on this Article
 (Click on Comments/Comment on this Article to show or hide comments/post a comment)
USEFUL LINKS
Recommended Funds
Recommended Portfolios
Chart Centre
Risk Profiler