What are FMP's
Acronym for Fixed Maturity Plan. They are close ended debt funds. For those of you familiar with bank fixed deposits, these are the closest comparable products, and are offered by mutual funds. Always for a fixed time period.
Why not just get a a bank FD then?
FMP's offer some significant tax advantages especially for those in the highest tax bracket.
Since they are debt funds, if you chose one where you hold it for more than 1 year you could get away by paying only 10% capital gains tax. Even if you chose to take your earnings in the form of dividend, the dividend distribution tax is much lower than the highest tax bracket. Naturally, tax rules change, so always check on the latest before investing.
What should I watch out for?
The quality of the portfolio, compare the potential returns with current fixed deposit rates. Make sure the paperwork-i.e. the forms and the account statements are impeccable. Put in a reminder to ensure that you get the money back on maturity. Take advantage of the tax breaks when filing your tax returns!
Where can you buy one?
Mutual funds float them from time to time.
What do Absolute returns mean?
If you invested Rs. 1 lac for 2 years in a bank and at the end of two years got Rs. 1.50 lacs back, your absolute return would be 50%.
The formula is really simple-You take the amount that you got back-in this case Rs. 1.50 lacs, subtract the amount you invested-in this case Rs. 1 lac. Divide the difference ( Rs 50,000) with your original investment i.e. Rs 100000, and multiply this by 100 to get the % return.
Step 1 Rs. 150000-100000 = Rs 50000
Step 2 Rs 50000/100000*100 = 50%
Formula
Absolute Return = Current market value - Cost of investment X 100
Cost of investment
Acronym for Fixed Maturity Plan. They are close ended debt funds. For those of you familiar with bank fixed deposits, these are the closest comparable products, and are offered by mutual funds. Always for a fixed time period.
Why not just get a a bank FD then?
FMP's offer some significant tax advantages especially for those in the highest tax bracket.
Since they are debt funds, if you chose one where you hold it for more than 1 year you could get away by paying only 10% capital gains tax. Even if you chose to take your earnings in the form of dividend, the dividend distribution tax is much lower than the highest tax bracket. Naturally, tax rules change, so always check on the latest before investing.
What should I watch out for?
The quality of the portfolio, compare the potential returns with current fixed deposit rates. Make sure the paperwork-i.e. the forms and the account statements are impeccable. Put in a reminder to ensure that you get the money back on maturity. Take advantage of the tax breaks when filing your tax returns!
Where can you buy one?
Mutual funds float them from time to time.
What do Absolute returns mean?
If you invested Rs. 1 lac for 2 years in a bank and at the end of two years got Rs. 1.50 lacs back, your absolute return would be 50%.
The formula is really simple-You take the amount that you got back-in this case Rs. 1.50 lacs, subtract the amount you invested-in this case Rs. 1 lac. Divide the difference ( Rs 50,000) with your original investment i.e. Rs 100000, and multiply this by 100 to get the % return.
Step 1 Rs. 150000-100000 = Rs 50000
Step 2 Rs 50000/100000*100 = 50%
Formula
Absolute Return = Current market value - Cost of investment X 100
Cost of investment
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