Fund houses are betting big on fixed maturity plans (FMPs) and as many as 20 fund houses have launched such plans in March so that investors get the advantage of double indexation.
Double indexation benefit means enjoying indexation benefits for more than one fiscal, without having to hold the asset for the second fiscal. Indexation is based on the concept that as inflation erodes the returns on an investment an investor should be made to pay tax only on the actual gains made by him on the investment.
“FMPs launched in March are typically for a maturity period of 13 months. As a result, the investor gets the benefit of indexation for two financial years. Due to this more fund houses come up with such schemes in March,” said K Ramkumar, head of fixed income at Sundaram BNP Paribas Mutual Fund. FMPs invest a significant corpus of their funds in short-term instruments like certificates of deposit (CDs) and commercial papers (CPs).
The other reason for more FMP launches is that March is a good time for locking in funds in short-term maturity instruments. “The short-term yields shoot up and the prices of short-term instruments fall. Fund managers enter into such investments at this time,” said Arjun Parthasarathy, head of fixed income at IDFC Mutual Fund.
“Short-term rates tend to spike up in March predominantly due to factors like advance tax outflows. Hence, fund houses tend to launch more FMPs to capitalise on this spike,” concurs Lakshmi Iyer, head of fixed income at Kotak Mahindra Mutual Fund.
Three-month CD rates have moved up to 5.35% from 3.45% on January 1. Similarly, six-month CD rates have risen to 5.75% from 4.45% on January 1. One-year CD rates are at 6.45% versus 5.8% in January.
Three-month CP rates have inched up to 5.98% from 4.83% at the start of the year and six-month CP rates are now at 6.45% versus 5.33% in January. One-year CP rates are at 7.10% versus 6.95% in January 1.
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