Mutual Funds FAQs
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Investor with low risk appetite have several options to choose among debt funds , one of them is FMPs. FMPs are close ended funds that investors can only invest at the time of the new fund offer (NFO) and can only exit at maturity. FMPs come with a pre – defined maturity which can range from 3 months to 5 years , and they invest in fixed income securities such as money market instruments, government bonds across the credit spectrum.Some of the features of FMps are as follows :-
- BUY AND HOLD STRATEGY - LOCKING- in Current YEILDS,
FMPs follow a buy and hold strategy, which help investors lock-in- the prevailing yields in the market. Hence, investor in FMPs benefit more in a high or rising interest rate scenario, as they can capture higher yields compared to a low interest rate environment.No interest rate risk
Debt mutual funds are primarily exposed to two types of risk-interest rate risk, and credit risk. As bond prices are inversely related to yields, the net asset values of open –ended debt funds are sensitive to interest rate changes, making them volatile. However, investors in FMPs do not face any interest rate risk, as the funds capture the current yields by holding on to the securities until they mature. Investors will earn returns equivalent to the locked-in yields, despite interest rate volatility during the holding period.FMPs vs FDs – Indexation benefits
FMPs are close ended Mutual Funds, which invests in securities of better credit quality. FMPs offers risk adjusted returns and taxation benefits.
In addition to the benefit of optimizing a high yield scenario, FMPs can potentially generate higher tax- adjusted returns, through the benefit of indexation for holding periods of more than three years, when compared to FDs. Long term capital gains are taxed at 20% after adjusting for indexation, where as the income earned on FDs are taxed at the investors tax slab. Indexation thus can help investors in earning better tax adjusted returns.
While FMPs are not exposed to interest rate risk, they do face credit risk like all debt funds. Since they invest in debt securities the credit rating spectrum, their returns are susceptible to risks arising from credit defaults or rating downgrades on the securities held in their portfolios. Investors with a low risk appetite can minimize this risk by investing in FMPs that largely invest in top rated AAA bonds, and those with a high risk appetite can invest in FMPs that also take exposure to below AAA rated bonds.
Budget 2019 has reduced the tax burden on taxpayers and has a positive impact on lower and middle income groups. Key highlights like No tax on income upto Rs.5 Lakhs, Hike in standard deduction will help taxpayers earning upto Rs.7.5 lakhs, end up paying zero taxes.
The budget proposals are likely to put greater stress on tax planning. These proposals will encourage tax payers to invest in tax saving instruments.