This note will explain the Factors to be considered before investing in FMPs.
While FMP offer several advantages over other fixed income products when interest rates are rising, there are still certain factors that investors should keep in mind before taking the plunge. Here are a few of them.
Check Indicative portfolio: If the indicative portfolio shows the portfolio will invest majority of the corpus in bank certificates of deposits (CDs), then the portfolio may have lower risks compared to FMP’s which invest predominantly in Commercial Papers (CPs). Seen from the other side, having Commercial Papers in the portfolio may mean slightly higher rates. So as an investor before investing in an FMP you should have a clear idea about the risks you are willing to take
Credit rating of the securities: You should also check the scheme’s offer document for the minimum credit rating of the securities the fund intends to invest into. The investors should also note that the higher the credit ratings of their securities, the lower the returns would be for the FMPs and vise versa. However lower credit rating securities have higher credit risks; hence investor should keep in mind the same.
Expense Ratio of the scheme – Investors should select a scheme which has a reasonable expense ratio as per the tenor of the FMP, as higher expense ratio reduces the overall yield on the FMP.
Maturity of the Scheme: Some of the FMPs launched between January and March every year offer double-indexation benefit. Double Indexation@ helps reducing long term capital gains thereby reducing overall tax liability
Growth or Dividend Option - The length of the holding period matters, especially when one has to decide between growth and dividend options. Investors can go for the growth option if the holding period is more than a year and for the dividend option if the holding period is less than a year.
Liquidity: Sebi rules mandate that all FMPs should be listed on the exchange, however liquidity in these instruments on stock exchanges is low. So as an investor if you are investing in an FMP, invest only those funds that you don’t need till the maturity of the fund, as option redeem with fund house is not available until maturity.
We will be explaining the factors investors should consider while investing in fixed income funds in our next week article.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
@ Investors should be aware that the fiscal rules/tax laws may change and there can be no guarantee that the current tax position may continue indefinitely. In view of the individual nature of tax consequences, each investor is advised to consult his/her professional tax advisor.