Q. Between Monthly Investment Plans (MIP) and fixed maturity plans which gives you higher returns?

SC Goyal, 61, retired engineer, Hardwar

They belong to different product class. MIPs are designed with the objective of giving a regular return to investors. The periodicity of returns depends upon the option chosen by the investor. MIPs generally come with the monthly, quarterly, half-yearly and annual options. They are launched with the very objective of giving a monthly income to investors.

Equity exposure is 10-30% in the most MIP schemes available in the market. Because of their equity component, Monthly Income Plans are more risky than pure debt funds.

FMPs are primarily fixed maturity plan with no equity component. FMPs with equity exposure are a bit different. FMPs having equity exposure are structured in such a way so that investors’ capital remains protected. For example, you take three-year FMP. The fund manager will tell you upfront that 15% of this will be invested in equity component. They follow a monthly systematic investment plan. Each month, 0.25 per cent, 0.50 per cent and one percent is put in equity. This is structured in a way that you get some share if markets perform very well and also your capital remains reasonably protected in case of worst scenario.

Q. How profitable is fixed maturity plan compared to liquid funds? Give us an idea about returns from three instruments-liquid funds, fixed maturity plans and monthly income plans.

Sunil Sahu, Trader, Delhi

A typical liquid plan provides you liquidity overnight. You can enter it anytime and leave at your convenience, though you may have to compromise on returns if your investment is for less time-one to three months. Investment in liquid fund gives you 0.25% to 0.50% less returns. So if you are planning to invest some money for three months, go for FMPs. The fund manager matches the tenure and invests in a saving instrument for three months. This can give you slightly better returns. In FMPs you don’t get day-to-day liquidity whereas you invest in liquid funds when you need liquidity on day-to-day basis.

If you want to invest in MIPs, your time horizon should be at least one year. As far as liquid funds are concerned, investment can even be for a day whereas fixed maturity plan period ranges from one month to five years. Liquid funds give you lesser return, compared to other instruments. Fixed maturity plan gives you one per cent extra returns. Here the returns depend on the maturity period of your investment. Longer you keep it the better it is.

MIP involves equity component, which makes it volatile, though MIPs have performed well in the past three to five years. With equity component, risk is more but potential returns are better at the same time.

Q. How profitable it is to invest in FMPs, particularly when the market is volatile? We know that MIPs were affected when market was down. Now considering that the FMPs have a component of equity, will it be profitable to invest in the FMPs when the market is volatile?

Sanjay Yadav, Jodhpur

Fixed maturity plan with equity component try to bring some discipline in your investment pattern. As far as MIPs are concerned, invest in them in a systematic way and it will give you good returns. But it is not possible for every investor. So they go for fixed maturity plans.

Here, the fund manager follows a systematic approach. If you have opted for a three-year investment plan, the fund manager decides every month to invest a particular percentage in equity for a period of three years. The investment pattern is worked out in such a way that even if the returns from equity are nil, your capital remains reasonably protected.

However, MIPs move with the market. But if you follow a disciplined approach, MIP is also good.

Q. How much return should you expect from FMPs with equity component?  How safe it is visa-vis bank deposits post tax?

The purpose of fixed maturity plan is to give you a reasonable indication about possible returns. Although FMPs are best held till maturity, they do offer the option of premature redemption, at the cost of an exit load. But it will impact your returns.

If you are looking for a fixed-income product with a holding period of less than one year, the dividend plans of debt mutual funds score over fixed-deposits, especially if you are in the highest tax slab. The tax incidence is half of what it is in other deposits. However, most people fear mutual funds due to their volatility in returns.

 Units sold within one year qualify as short-term capital gains and are subject to tax at the marginal income-tax rate. Units sold after one-year attract long-term capital gains of 20% plus a surcharge of 10% and 2% cess after availing of indexation benefits or a flat 10% plus a surcharge of 10% and 2% cess.

Indexation is a relief provided by adjusting the return on which tax is calculated downward, to allow for reduced buying power of the saved amount due to inflation during the period of saving.

Q. Is there any capital guarantee on FMPs?

Abhiram Roy

Though FMPs do not guarantee returns, a person who saves in an FMP has a fair idea of his indicative returns based on returns of similar duration bonds available in the market. This allows the fund to keep getting the agreed rate of interest on the bonds, effectively reducing what is called price risk. FMPs are able to mitigate most of the risks by the very nature of their structure.

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