SBI Fixed Maturity Plan (FMP): Interest rate, tax, indexation benefits and risks explained
SBI Fixed Maturity Plan (FMP) is a close-ended mutual fund (MF) scheme to provide income and capital growth with limited interest rate risk to investors.
SBI Fixed Maturity Plan (FMP) is a close-ended mutual fund (MF) scheme to provide income and capital growth with limited interest rate risk to investors. Under the scheme, the subscriber's money is invested in a portfolio comprising of debt instruments such as government securities, PSU and corporate bonds etc. maturing on or before the maturity of the scheme. If you plan to invest in the SBI FMP, here are a few important things to know:
Who should invest in SBI FMP?
If you invest in SBI FMP, your funds will be locked in till the maturity. Hence, you shouldn't invest in FMP in case you may need the money before maturity. SBI MF portal says, "FMPs are ideal for investors who are keen to stay invested for the tenure of the scheme and seeking an alternate investment option which aims to provide better post-tax returns with minimal interest rate risk."
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SBI FMP Tenure
Under FMP, the investment in debt instruments matures in line with the tenure of the scheme. Hence, the tenure can vary between a few months to a few years. Currently, there are two live FMPs being offered by the SBI Mutual Fund. The subscription to one of them ends today.
i. SBI Fixed Maturity Plan (FMP) - Series 5 (92 Days). The last date to subscribe to this scheme is today.
ii. SBI Fixed Maturity Plan (FMP) - Series 6 (3668 Days). The last date to subscribe in this scheme is May 15, 2019.
SBI FMP Benefits
Less interest rate risks: The FMPs have very little exposure to interest rate risks as the fund manager normally holds the instruments till their maturity.
Minimum credit, liquidity risks: FMPs invest in securities with higher credit quality which minimises the credit and liquidity risks.
Less cost: Under the FMP scheme, there is no buying or selling of securities. This reduces the costs of the scheme.
Tax gain, Indexation benefit: FMP investors can take advantage of the indexation benefit, which helps in lowering the tax on their gains. As per current regulations, long term capital gains from debt mutual funds, such as FMPs, enjoy the indexation benefit. Indexation is basically a technique to adjust the cost of the investment in FMP vis-a-vis inflation during the investment period. The purchase price of the debt fund is adjusted to reflect the effect of inflation on it.
Indexation helps in reducing an investors' overall tax liability.
In case of FMP investment, the cost/purchase price of the instrument is adjusted by incorporating the impact of inflation on the amount you have invested during the tenure of the investment, or the financial years between the start of the investment and the maturity.
As per the current rules, long term capital gains (LTCG) from debt mutual funds like FMP enjoy indexation benefits. The investment made for a period of over 36 months in FMP qualifies to be considered a long-term investment. The tax liability on any gains arising from this investment is 20% (plus surcharge) with indexation.