Wary of equities? Check the new age mantra of FMPs

By Suresh Sadagopan, Principal Financial Planner, Ladder7 Financial Advisories

Hemant is down in spirit as his substantial stock investments have come down in value. He is cursing himself for investing so much in stocks, much against his native intelligence. He now wants to invest money in Fixed income instruments like FDs, NCDs, Bonds etc. His friend Manish counsels him not to panic about the equity investments, and suggests that he even increase the holdings in equities as the equities as percentage of his assets would have gone down. Hemant was looking at Manish, as if he were a gibbering baboon.

Manish understood and changed tack. Most investors including Manish, are wary of investing at this point, given the volatility. At an intuitive level, Manish understands that it would be a good idea to invest in equity now. But, he just does not have the will to follow that through. Hemant wanted something safe.

Manish was now explaining to Hemant about Fixed Maturity Plan (FMPs). Debt instruments were offering good returns. But when he heard that the post-tax returns in a FMP can be as high as 8.5- 9%, he was salivating. Bank FDs, were offering upto 10.5% per annum interest. That looks impressive. But, for a person in the highest tax bracket, it translates to a post-tax return of just 7.25%.  The difference between the returns offered by FMPs is between 17-24% more than FDs, on a post-tax basis.

Hemant was all ears