Roll over FMPs
Many people whose investments in fixed maturity plans ( FMPs) are nearing completion of tenure are choosing not to roll these over. These investors are shifting to other products, especially hybrid or balanced funds. A sudden change in tax treatment of FMPs" is a major issue that investors are facing. They are not comfortable staying locked in for three years ( incrementally another two years, after rollover). Besides, equity markets have been doing well for a few months, giving investors the comfort to invest. And, there is no long term capital gains tax on equities after a year. Fund houses have been asking investors to roll over their money in FMPs. If one has stayed invested for 15- 18 months, they believe, it makes sense to stay invested for the remaining three years. Else, the tax blow will substantially reduce the maturity corpus. " We need to take into account the macroeconomic factors. There are no doubting the fact that the interest rates will eventually come down. When that will happen, though, is not known. Today, the interest rates are at their peak, so if you have a long term investment horizon ( of two or three years), it makes sense to lock in at a higher yield. Rolling over FMPs, therefore, will make more sense.
Tax- efficient investment planning should also be considered. This also makes way for rolling over of FMPs, unless you need cash in the near future.
An open- ended fund is recommended only for those with shorter- term investment horizon (of six to seven months). This is also because capital protection is of utmost importance when time in hand is limited. Someone with a lower risk appetite would invest in a debt- oriented hybrid ( open- ended) fund rather than staying locked in.
The reason: In 2012, most thought the interest rates had peaked and advised locking in at those rates. But then the rates were increased further and many lost money. Given that markets cannot be timed, it is better to invest in open- ended funds. Additionally, if one is staying invested for three years, there is no special exemption provided for staying locked in an FMP. Both FMPs and debt- oriented hybrid funds have the same tax treatment — the indexation benefit kicks in after three years and short- term investments are taxed at slab rate. Besides, both invest in similar maturity bonds. If interest rates move up, an investor of open- ended funds will have a window to escape. However, if one can stomach equity- related risk, equity- oriented balanced funds are a better bet both in terms of returns and tax efficiency. The upside in FMPs is capped when compared to hybrid funds ( as these have an equity component). And, the economic conditions will see equities and duration funds doing well going forward. To that extent, staying put in FMPs might not offer as high returns.
Since staying invested for three years will be tax- efficient and interest rates will also come down by then, both debt and equities will offer good returns over the next two- three years.
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