In March every year, there is a marketing drive by the mutual fund industry to promote Fixed Maturity Plans (FMPs), of little more than three year maturity.
In March every year, there is a case for investment in debt funds, to avail of indexation benefit for computation of long term capital gains tax, over a holding period of more than three years. The added attraction of investment in March is that for a holding period of little more than three years, indexation benefit is available for four years. As an example, if you invest in a debt fund in March 2019 and redeem in April 2022, your year of investment is 2018-19 and year of redemption is 2022-23. Your investment is for a period little more than three years, but indexation is for a period of four years.
This is an effective and efficient way of tax planning; without taking any additional risk, net of tax return is being enhanced. In March every year, there is a marketing drive by the mutual fund industry to promote Fixed Maturity Plans (FMPs), of little more than three year maturity. This is beneficial for investors as well, because not every investor is guided by an investment advisor and may not otherwise be aware how to generate tax efficiency. However, the point is, tax treatment is same for all debt funds, be it close ended funds (like FMPs) or open ended funds. There is no issue in investing in FMPs, but to be borne in mind, FMPs cannot be redeemed by the AMC prior to maturity. The only way to exit, if the investor requires liquidity, is to sell in the secondary market. Unfortunately, there is no liquidity in the secondary market and the money gets practically locked in for the tenure of the FMP.
As against FMPs, the entire gamut of open ended funds, from Liquid to Long Maturity to Gilt, has the same tax treatment. The advantage of open ended funds over FMPs is liquidity; it can be redeemed with the AMC, subject to exit load, if any. The investor can pick any open-ended fund, be it short-portfolio-maturity or long-portfolio-maturity, which suits his/her investment profile. The probable reason why the industry promotes FMPs in this space is that it is comparable to term deposits, with a defined maturity, with the advantage of tax efficiency. From a comparable investment perspective, investors can look at a couple of open-ended funds where the portfolio maturity is run down gradually, hence in a way these funds behave like FMPs. That is, after three years, risk on market movements is minimal. If the investor requires liquidity in the interim, e.g. prior to April 2022 in the example cited above, it can be redeemed with the AMC.
[The author is the Founder of wiseinvestor.in. The views and opinions expressed in this article are those of the author and do not necessarily reflect that of Business Television India (BTVI)]