Tuesday, 12 April 2011

Investors can get more from Mutual Fund through Fixed Maturity Plan

Fixed Maturity Plans (FMP) is a type of Mutual Fund. But in Fixed Maturity Plans the pooled money of investors invest in debt products and most of the time the maturity of the debt product will be same as the maturity of fixed maturity plan. The Fixed Maturity Plan will be a closed ended mutual fund and the maturity of the mutual fund it predetermined at the time of New Fund Offering (NFO). These FMPs invest the money in Government securities and other company debt products and these investments are almost safe and risk factor is comparatively very low than other mutual funds.

Fixed Maturity Plans are considered as safe investment, but it is not much safe when compare with bank fixed deposits, because in Fixed Deposits the interest is guaranteed and in case of Fixed Maturity Plan the outcome is not guaranteed. There may be loss when the financial instruments in which the FMPs invested in become loss. In fixed maturity plan the tenure is fixed and after the stipulated period the FMP is closed and the NAV will be given to the investor.

But if the investor study the market well and invest in selected FMPs, he can earn a good income from FMP than Fixed Deposits. So always deposit in reputed FMPs.

Tax Planning Tips for Fixed Maturity Plans

There are two type of tax benefit for a FMP which a fixed deposit does not have. In Fixed deposit the interest is taxable, but in FMPs the dividend income is not taxable, all mutual fund dividends are not taxable for investors. (Actually there is a dividend distribution tax (@14.03% for retail investors and 22.44% for corporate investments) the company should pay, but it is a fixed rate of tax and the investors tax slab is not applicable) So for short term FMPs choose dividend option which is not taxable and you can get a tax free income from short term FMPs.

For long term FMPs (FMPs more than one year duration) you can apply the indexation benefit and taxable as long term capital gain. With indexation the tax is 20% and without indexation the tax is only 10%. You can calculate both the options (Indexation and non indexation) and can choose the method which gives more benefit.

Both the above cases the tax slab of the investor is not considered. Only a fixed rate of tax is applicable. But there is no such advantage in fixed deposits.

So if you invest wisely you can make a good income from the mutual fund with fixed maturity plans.

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