Fixed Maturity Plans (FMP) – an attractive Debt MF option

1. - -
MUTUAL FUNDS 10 Mar 2016
Fixed Maturity Plans (FMP) – an attractive Debt MF option
RETAIL RESEARCH P a g e | 1
RETAIL RESEARCH
Current and Forthcoming FMP NFOs:
Scheme Name Open Date Close Date Tenure
Intended Portfolio Allocation in debt instruments
(credit rating break-up) (%)
AAA A+ AA A BBB A1 NA
3 Months & Above
ICICI Pru FMP - Sr.78 - 91Days Plan S - (G) 8-Mar-16 14-Mar-16 91 Days - - - 20-25% - 70-80% -
IDFC FTP - Sr.120 (G) 14-Mar-16 15-Mar-16 90 Days - - - - - 100% -
Reliance Fixed Horizon Fund - XXX - Series 15 17-Mar-16 21-Mar-16 92 days - - - - - 95-100% -
3 Years & Above
Birla Sun Life FTP - Series NN (G) 10-Mar-16 10-Mar-16 1160 Days 95-100% 0-5% - - - - 0-5%
Birla Sun Life FTP - Series NO (G) 11-Mar-16 16-Mar-16 1168 Days 95-100% 0-5% - - - - 0-5%
DHFL Pramerica Fixed Duration - Sr.28 (G) 14-Mar-16 15-Mar-16 1121 Days NA NA NA NA NA NA NA
HDFC FMP - 1140Days-Mar 2016(1)(XXXV) (G) 10-Mar-16 16-Mar-16 1140 Days - 0-5% 10-15% 75-80% - - 0%-5%
ICICI Pru FMP - Sr.78 - 1127Days R - Reg (G) 4-Mar-16 16-Mar-16 1127 Days - - 100% - - - -
Indiabulls FMP - Series V - Plan 1 (G) 4-Mar-16 10-Mar-16 1175 Days 0-50% 10% 20-100% 40-90% - - 0-10%
Kotak FMP - Series 191 - 1120 Days (G) 10-Mar-16 10-Mar-16 1120 Days 95-100% - - - - - 0-5%
Reliance Dual Advantage FTF - IX - Plan B (G) 14-Mar-16 28-Mar-16 1201 Days - - 80-85% - - - 0-5%
Reliance Fixed Horizon - XXX - Sr.11 (G) 4-Mar-16 18-Mar-16 1169 Days - - 20%-25% 75%-80% - - 0-5%
Reliance Fixed Horizon - XXX - Sr.13 (G) 11-Mar-16 15-Mar-16 1124 Days 95-100% - - - - - 0-5%
Reliance Fixed Horizon - XXX - Sr.14 (G) 16-Mar-16 28-Mar-16 1161 Days - - 20%-25% 75%-80% - - 0-5%
Religare Invesco FMP - Sr.XXVII - Plan F (G) 8-Mar-16 9-Mar-16 1140 Days 95-100% - - - - - 0-5%
SBI Debt Fund Series B - 35 (G) 10-Mar-16 17-Mar-16 1131 Days - 0-5% 95-100% - - - 0-5%
UTI-FTI - Series XXIV - V(1132Days)-Reg(G) 1-Mar-16 15-Mar-16 1132 Days 50% - 50% - - - -
Schemes highlighted in yellow have higher exposure to better credit rated instruments on initiation date and hence are more preferred. FMP details as on March 10, 2016. Source:NAVIndia & SIDs
What are Fixed Maturity Plans (FMPs)?
Fixed Maturity Plans (FMPs) are closed ended debt mutual fund schemes having a fixed maturity period ranging from one month
to five years. FMPs invest in debt & money market instruments maturing on or before the date of the maturity of the scheme.
The schemes are shut down generally once they get matured.
Objective of FMPs: FMPs are predominantly debt-oriented and their objective is to provide steady returns over a fixed-maturity
period, thereby protecting investors from market fluctuations.
Structure:
FMP’s NFOs are generally opened for one to five days and accept minimum investment amount as Rs. 5,000.
FMPs invest in Government securities, PSU bonds, corporate debts and money market instruments such as Certificate of
Deposits, Commercial papers and T Bill, Fixed Deposits, CBLO and Call money papers. Typically, FMPs do not have equity exposure
in their portfolio. Further, exposure in to Government securities seen limited may be due to lower yields as compared to
corporate bonds.
Portfolio composition of FMPs:
An FMP invests in the above mentioned debt instruments that get matured at or around the same time as the scheme matures.
Given the structure, it is implied that the returns are always in positive terrain if held till maturity. This means that FMP portfolios
are semi passively managed mutual fund schemes as there is no buying and selling or churning happening during the tenure of
the FMPs. The fund manager remains active in the initial period and constructs portfolio of debt securities that mature around
the same time when the FMP are supposed to mature. These debt investments are usually held till maturity. Due to this reason,
there is not much price risk (possibility of a loss if the debt is sold at a price lower than its purchase price).

2. RETAIL RESEARCH
RETAIL RESEARCH P a g e | 2
The fund manager knows the indicative return he would get from the investment, as the coupon rate of securities to be invested
is known. It is noteworthy to say that the SEBI has strictly instructed all the fund houses to stop selling fixed maturity plans on the
basis of indicative returns as such practice is unethical and results in guaranteeing returns.
Benefit of investing in FMP:
 Capital Protection and No Interest Rate Volatility: Since FMP invest in debt instruments, FMPs provide low risk of capital
loss as compared to equity funds. As the securities are held till maturity, FMPs are not affected by interest rate volatility.
 Taxation Benefit: FMPs offer better post-tax returns than FDs as they offer indexation benefits. Indexation helps to lower
capital gains and thus lower the tax.
Suited for;
FMPs with minimum 3 years maturity are an ideal investment avenue for investors who;
 Need capital protection.
 Want to take a minimum exposure to debt market risks.
 Wish to park funds for a long-term goal.
 Wish to avail double indexation tax benefits.
 Earn a steady return on investment.
FMPs with less than 3 years maturity are an ideal investment for all investors and especially for the investors in lower tax bracket
like 10% and 20% who can consider invest in Growth option of the FMP.
Returns from the FMPs:
The returns that are generated from FMPs are determined by the two parameters. One, the period when the FMP portfolio is set
up and second, the instruments the FMP invests in.
 The FMPs that are launched during high interest rate scenario in the domestic economy would yield better or higher
returns as the debt instruments are available with higher coupon rates during those periods.
Please note, it is always good time to invest in FMPs if investors are looking for predictable returns for a particular tenure.
However, FMP investment will not help to take benefit from the change in the interest rate environment. On the other
hand, most open ended debt funds benefit when there is a fall in interest rate.
 Secondly, FMPs invest in the debt instruments especially in corporate debentures (& NCDs) with varying credit rating.
Debt instruments that are issued by the PSUs and corporates are rated by credit rating agencies. The rating agencies
assign rating based on the financial health of the companies and the ability to repay their debts. In Long Term debt
instruments, the credit rating scale ranges from AAA to D (i.e, AAA, AA, A, BBB, BB, B, C & D). AAA indicates a low
probability of default and D indicates that the borrower is in default, or will most likely default. An additional ‘+’ or ’–‘ sign
is affixed to the ratings (AA to C) to indicate higher or lower quality among the debts of the same rating.
Some of the FMP fund managers prefer to invest in AA and A rated papers given their attractive yields. Normally, lower
rated debt securities bear higher coupon rates than that of the higher rated papers due to their comparatively lower
creditworthiness. On the same time, one has to look at the other side – the risk involved in it. As a rule of thumb, the
riskier the debt, the higher is the return on it. Further, there is a chance of downgrade in the rating in any rated debt
instruments during the tenure of the FMP.

3. RETAIL RESEARCH
RETAIL RESEARCH P a g e | 3
Normally, FMPs investing in highly rated debt (say, AAA rated debt papers) are considered low risk. The above table
shows the break-up of the portfolio allocation in the corporate bonds with different credit rating. Hence, the investors
have to be careful while choosing FMPs.
Liquidity:
FMPs are close ended funds. Hence, AMCs do not allow premature redemption on FMPs during period and investors are
compelled to stay till maturity. However, premature withdrawals are allowed on the stock exchanges where these units are listed
and traded at market prices. However this route is not very liquid and if at all their prices trade at a huge discount to their NAVs.
Comparison of FMP & Bank FD:
Particular Fixed Maturity Plans (FMP) Bank Fixed Deposit (FD)
Asset Class Debt Debt
Offered by Mutual Funds Banks
Overall Safety Safe, but less safe compared to bank FDs Safer than FMPs
Safety on Principal amount No guarantee. In extreme cases, there may be a minor loss in capital
The principal amount invested in Bank FDs is
guaranteed by the government to the extent of Rs.
1 lakh
Type of investment Fixed duration Fixed duration
Duration of investment 1 month to 5 years 15 days to 10 years
Money invested in
Commercial Paper (CP), Certificate of Deposit (CD), Money market
instruments, corporate bonds and bank FDs
Advances and investments
Rate of return
Usually beats inflation by a small margin, post tax return is better than bank
FDs
Usually beats inflation by a small margin, post tax
return is a little lesser than FMPs
Rate of return (at the time of investment) Not guaranteed Guaranteed
Expense Ratio 0.25% to 1% per year 0%
Exit Load Nil From 0% to 1% (Penalty for breaking an FD)
Liquidity Very limited. Exit option available with exchanges.
Available. There may be penalty for pre-mature
withdrawal.
Tax treatment of returns
Dividend: Tax free in the hand of investor. However, the AMC deducts
28.84% as DDT (29.6125% in case of income above Rs. One Cr) for individual
investors and 34.608% for domestic firms Interest earned is clubbed with that year’s income,
and is taxed as per the applicable IT slabs. (i.e,
taxed every year even in cumulative options)
Short term gain: If redeemed within 3 years, the gain is clubbed with that
year’s income, and is taxed as per the applicable IT slabs
Long-term gain: Taxed at 20% with indexation, if redeemed after 3 years.
Tax benefit u/s 80C No Yes. Only on 5 Year Bank FD
Tax Treatment (As per the current law):
FMPs are tax-efficient. They are subject to capital gains tax and dividend distribution tax. The tax treatment depends on the
choosing of investment options such as growth or dividend. In Dividend option, investors have to bear dividend distribution tax,
whereas in the Growth option returns earned are treated as capital gains (short-term or long-term depending on tenure of
investment).
In Dividend option:
The dividend declared in FMPs are Tax free in the hand of investor. However, the AMC deducts 28.84% as DDT (29.6125% in case
of income above Rs. One Cr) for individual/HUF investors and 34.608% for domestic firms.
Under Growth option in FMP:
The short-term capital gain is applicable if the units of the FMPs redeemed within 3 years wherein the STCG tax is levied as per
the investor tax bracket. On the other hand, the Long Term Capital Gain Tax is applicable if the units of the FMPs redeemed after

4. RETAIL RESEARCH
RETAIL RESEARCH P a g e | 4
3 years which is charged at 20% with indexation that is 23.072% (+ 12% Surcharge + 3% Cess) for individual/HUF investors for the
income below Rs. 1 crore.
Here, the investor can take advantage of double indexation by investing in one financial year and then sell in the third or fourth
financial year from then.
Double Indexation Benefit:
Indexation helps to lower capital gains. Double indexation allows an investor to take advantage of indexing his investment to
inflation for 2 or more years (3 or more years in case of FMPs).
We can explain with the following example. Consider that, you need to pay Rs. 130 for 1 kg of sugar as on today for which you
had paid Rs. 100 three years before. Though the utility from the product is as same as today and three years before, you need to
pay Rs. 30 extra in the price of the 1 kg sugar because of the rise in the inflation.
Now considering the another example in investment assuming that the principal amount of Rs. 1,00,000 that you had invested 3
years before in 10% interest paying bond become now Rs. 1,33,100. The profit (or capital gain) is Rs. 33,100.
Here, as shown in the first example the current value of Rs. 1,33,100 has also included the inflation (that means, Rs 33,100 = Real
profit + inflation). The impact of inflation is attributable to every goods and services. So, while calculating real profit (Capital
Gains), the Govt allows to adjust the cost of the investment with the inflation. For this purpose, every year Central Government
(CBDT) notifies Cost Inflation Index (CII) to adjust for inflation the value of assets.
CII indices are available starting 1981-82. When you use CII for calculating long term capital gains, your gains are reduced by an
amount - which is attributable to rising inflation. Just so you don't have to pay tax on your gains which have simply resulted due
to inflation. Applying a CII factor increases your cost base (and lowers your gains) since the purchase price is adjusted for the
impact of inflation.
Cost inflation index table:
Financial Year Index Financial Year Index Financial Year Index
1981-82 100 1993-94 244 2005-06 497
1982-83 109 1994-95 259 2006-07 519
1983-84 116 1995-96 281 2007-08 551
1984-85 125 1996-97 305 2008-09 582
1985-86 133 1997-98 331 2009-10 632
1986-87 140 1998-99 351 2010-11 711
1987-88 150 1999-00 389 2011-12 758
1988-89 161 2000-01 406 2012-13 852
1989-90 172 2001-02 426 2013-14 939
1990-91 182 2002-03 447 2014-15 1024
1991-92 199 2003-04 463 2015-16 1081
1992-93 223 2004-05 480
Suppose you invested Rs 1 lakh in an FMP in March 2012 (financial year 2011-12) and sell your investment in April 2015 (financial
year 2015-2016). Now, you will get accrued interest of approximately 9% on this investment. Now, as per current tax laws you
can pay the tax on long-term capital gains with 20% indexation. Assuming that a 9% return per annum on your investment, your
total fund value will be Rs. 1,29,503 (investment Rs.1,00,000 and a capital gain of Rs. 29,503) in April 2015.
Now the tax calculation would work as follows: The CII (cost inflation index) for the year 2011-12 is 758 and the CII for 2015-16 is
1081. The proportion of CII between two periods is 1.426 (1081/758) and adjusting the CII with the cost of Rs. 1 lakh would
become Rs. 1,42,612. The capital gain with double indexation in this case will be Rs 1,29,503 - 1,42,612 = (-) 13,109. Thus, as per

5. RETAIL RESEARCH
RETAIL RESEARCH P a g e | 5
the calculation, you make a loss of 13,109. That means you will pay zero tax, or your returns are tax-free. In fact you can even set-
off/carry forward this loss against other long term capital gains subject to some conditions.
FMPs are better than tax-free bonds in terms of higher post tax return generated based on current prevailing interest rates;
however they are locked in for the tenure of the FMP while tax free bonds can be sold anytime on the exchange. Further tax free
bonds value can rise/fall based on the fall/rise in the general interest rates, while in FMP there is no scope for making a gain/loss
beyond the interest rates locked in at the time of initiation of FMP.
Analyst: Dhuraivel Gunasekaran (Dhuraivel.gunasekaran@hdfcsec.com)
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office.
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022)
2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the
recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information
contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell
securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may
not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.