FMPs are close –ended debt mutual fund schemes with a fixed maturity horizon, where the corpus is invested in fixed-income securities like Money Market Instruments, Commercial Papers (CP), Certificate of Deposits (CDs), Corporate Bonds and even in bank fixed deposits. The maturity period lies from one month to few years.
FMP’s are popular in the market as alternative of a fixed deposit in a bank, but come with conditions. The maturity amount of a fixed deposit in a bank is 'guaranteed', but in the FMP it is not mentioned. The regulator does not allow fund companies to guarantee returns, and hence even showing indicative returns' in FMP is banned.
Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. Since the fund house knows the interest rate that it will earn on its investments, it can provide 'indicative returns' to investors.
The NFO of FMP’s are generally open for 3 -4 days and targeted to corporate and Co-operative Societies and HNI’s. However even the retail customer can invest because the minimum investment is Rs 5,000.The fund manager invests the collected money into only those instruments that have similar maturity as of the FMP. Suppose FMP is of 1 year then fund manager will invest in only those instruments maturing in one year.
The indicative returns are easy to calculate. If one knows the current yield prevailing in the market then just deduct the expense ratio (mentioned in offer document) and the remaining will be the indicative return that you can expect from FMP.
Let us understand the difference between FD and FMP with the help of below table
On the other hand Mr. B who has now an option of either to pay flat 10% on the total gain i.e. Rs.2000/- or to pay 20% on the gain after calculating indexed value of his investment. This will be any way lesser than what Mr. A has paid. So, it is clear that FMP’s are more tax efficient and do earn better returns than fixed deposits of similar tenure.
How to know if FMP’s are available in market or not?
As mentioned above that the product is not well marketed by companies as well as by agents due to low commission payout and hence you will find very few people recommending it for your portfolio. The best way to find out about FMP is to ask your Investment Adviser or Financial Planner.
Conclusion – Whether to invest in FMP or not?
It is clear from the above comparison that FMP’s are more tax efficient then bank FD’s and are suitable for your portfolio if you are comfortable with the risk associated with it. Before investing into this product, understand your needs and if this product fits into your zone then go for it.