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With the financial year drawing to a close, Fixed Maturity Plans ( FMPs) that will mature in the next 18 to 30 months are in vogue, as yields on these products have been higher. But investors seeking to invest in these funds have to hurry, as rates are showing signs of easing.
Over the past few weeks, a host of FMPs targeting a tenure of over 18 months were launched with higher interest rates. The corresponding yields on such investments in the market have been hovering at 9.5- 9.7 per cent. Now, yields are beginning to come- off. We have been seeing more longer- term FMPs coming into the market as the yields were high but the yields have been slowly coming off and that would mean returns are falling lower. Nevertheless, as compared to tax- free bonds, longer- term FMPs of around 18 months still offer returns of around 9 to 9.5 per cent with double indexation benefits if you invest now for 18 months at least.
Tax- free bonds, on the other hand, have tenure of 10 or 15 years and offer a rate of 8.5- 8.75 per cent. For being invested this long, you face market risk if you want to exit mid- way. That is, the price of these bonds can bounce up and down depending on the where the interest rates are heading. When interest rates rise, bond prices fall and vice versa, while the impact on longterm bonds is even more as investors adjust the yields against the duration.
FMPs do not see such choppiness because of the lower maturity period and because they are usually not listed and see very little trading, while at the same time offering as good, if not better yields.
There is a price risk in tax- free bonds, as interest rates keeps changing, while FMPs have a lower market risks and returns are reasonable. Experts say that rate increases are a good time to lock into FMPs at a lower credit risk. This was one reason why FMPs were lapped by investors in the past year. The yields on FMPs had shot up to 10- 10.5 levels as the Reserve Bank of India increased short- term rates to defend a falling rupee.
In August, when interest rates on certifictes of deposits and corporate bonds surged close to 10.75 per cent, investors lapped ₹ 19,947 crore worth of FMPs. In 2013, close to ₹ 1.05 lakh crore was invested in FMPs, according to Value Research data, as compared to ₹ 90,000 crore in 2012. With interest rates still ruling high, investors might do well to look up FMPs once again.
But hurry and watch for the rate spikes in the market to benefit from a better yield.
Besides double indexation benefits, these instruments are also giving high returns
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