Greed or Caution-Should you subscribe to long term FMP's

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The media is blasting us with dire warnings that interest rates are teetering on the edge of a drop
Mutual funds are on the same bandwagon. The market place is full of FMP's, many of them luring you with offers of FMP's for longish periods-18-26 months.
Ostensibly, this is to make sure that you, their beloved clients make great returns for a long time.... But a word to the wise......

Mutual funds are not charitable organisations-they are all in the race to be  'top dogs' . This means they want to build AUM (Assets under Management). Fixed Maturity Plans (FMP's), especially with longer terms, gets them AUM locked in.  So they pay advisors more commissions to bring in this money.

You should make sure, before you write that cheque, that you know what to look out for. To start with, the longer the lock in, the higher the risks.  Start with determining the quality of paper that the AMC plans to invest in. If it is less than AAA, think again. Even within AAA rated companies, do be aware that the rating is given only for one year at a time. So there is no guarantee that the rating will be the same for the entire term.

Another KEY question to ask when your advisor tries to sell you this product on the basis of 'yield' is whether the yield is 'simple' or compounded. What you want to know is the 'compounded yield. You'll be surprised at the difference! This is particularly important on schemes where the lock in is over 2 years. For less than 2 years, insist on the 'annualised' yield.

Keep in mind that unlike a bank FD, once you invest its really hard to access the capital till it matures. You can't take a loan against it either. So think carefully and be reasonably certain you wont need the money early.

Don't get me wrong - If you are careful about your choices, it must be said that the FMP product is actually a great one for those of you in the 30% tax bracket. Great tax arbitrage ( Dividend distribution tax is 13.52% vs 30%+ Income tax). No wealth tax. Capital gains tax @ 10%. Hard to find better debt products.