Kotak FMP

[Atiker]

Any feedback on Kotak FMP (Fixed Maturity Plans)?

Kotak FMP Series 37 Debt Scheme | Tax Efficient Mutual Funds | Best Close Ended Debt Scheme In India | Invest In Fixed Maturity Plans

Why am I going for it ?

1. I am not comfortable with the market PE, as you would have noted in my previous posts that I am no fan of investing in market when PE is above 20. Since some time I have been reducing equity exposure and currently loaded with cash rotting in savings account.

2. From tax perspective better than FD.

FD returns are taxed at nominal rate, whereas this FMP is of duration 370 days (> 1 year) so will be taxed at 10% without indexation and 20% with indexation.

3. Two year indexation benefit won't be available for debt fund spanning 2 financial years after DTC effective 1 April 2012, so no point going for 13, 14 months FMP early next financial year.

4. Current CP/CD (Commercial Paper/ Debt) rates are hovering around 9.5 to 10 , FMP can lock these returns for a year.

I have two questions for the gurus

1.
General - Why should a person in highest tax bracket should ever go for an FD ? I now feel stupid why ever I went for an FD and paid extra tax when FMP were available. Is there any flaw in this statement?

Assumption - Risk associated with FMP is marginally more than the FD and should not be a cause of concern.

2.
Specific - I need feedback on Kotak FMP series. Any issues with Kotak that I should be aware of ? Would you suggest any other FMP ?

 

[Alchemist]

1.
General - Why should a person in highest tax bracket should ever go for an FD ? I now feel stupid why ever I went for an FD and paid extra tax when FMP were available. Is there any flaw in this statement?

2.
Specific - I need feedback on Kotak FMP series. Any issues with Kotak that I should be aware of ? Would you suggest any other FMP ?

You are correct. An FMP is more tax efficient compared to a fixed deposit.

FMPs are more popular among corporates and HNIs, but not among small retail investors.

One reason is for this is the lack of awareness. Most retail investors don't even know what an FMP is.

One obvious question is why investors should prefer FMPs to bank deposits. The reason is mostly to do with tax efficiency. When you put money in a fixed deposit, the interest gets added to your income. In FMPs longer than a year, if you elect to take all your gains as capital appreciation, the taxation is merely 10 per cent with indexation benefit or 20 per cent with indexation. That’s generally quite a saving from the tax rate which either individuals or companies would pay on the interest earned from a bank deposit.

Even for investments less than a year, there’s a tax advantage if the investor takes the option of receiving the gains in the form of dividends. In this case, individual investors will get taxed at 12.5 per cent of the returns and corporates will get taxed at 20 per cent. This is the dividend distribution tax that is deducted by the fund company. Once this is paid, no further taxation applies to the income. Although this is obviously not as much of a tax advantage as the long-term capital gains option, it’s still a lot lower than the full tax payable on bank deposits.

FMP or FD? The Question Answered! - Value Research: The Complete Guide to Mutual Funds

I have never invested in any FMP till now and so won't be able to comment on your second question.

 

[magnet]

Even I have not invested in FMP yet but i had decided recently that i'll go for it. But than i read somewhere in DTC the double indexation benefit which we used to get will be outdone. I wasn't able to understand but what was coming out was now FMP returns wont be much differing from fds.

 

[Atiker]

Even I have not invested in FMP yet but i had decided recently that i'll go for it. But than i read somewhere in DTC the double indexation benefit which we used to get will be outdone. I wasn't able to understand but what was coming out was now FMP returns wont be much differing from fds.

FMPs still are more tax efficient than FD for taxable persons.

 

[milind]

FMP's are skewed and complex product

1 No fixed/guaranteed returns...many a times the returns are much lower than FD (Most financial sites/advisors will not disclose such cases..brokerage chahiye)

2 FMPS taxation is complicated

3 No transparency in where exactly they are investing...many a times the corporates they invest goes kaput...

4 No comparative evaluations of various FMPs available..lack of clarity

FD's and other govt products are never promoted by financial advisors/sites since there is hardly any sizeable brokerage they receive from them..also advertisement revenue for there websites is generated by financial companies and not govt.

For high tax bracket...best option is "tax free bonds" / NCD from secondary market...NPS ...
All are risk free..and good returns...
For high returns go for equity...don't squeeze debt instruments (and take high risk) ...it's like asking a maruti to carry a truckload...

 

[Atiker]

FMP's are skewed and complex product

1 No fixed/guaranted returns...many a times the returns are much lower than FD (Most financial sites/advisors will not disclose such cases..brokerage chahiye)

Actually returns are generally better than Bank FDs unless there is an untoward happening. CP/CD returns are higher than Bank FD rates

2 FMPS taxation is complicated

Subjective, For person in 30% bracket, tax benefits compensate for this pain For Retired or non-earning or non-taxable person who is not dependent on this "amount" for monthly expenses, the non-TDS benefit is useful.

3 No transperancy in where exactly they are investing...many a times the corporates they invest goes kaput...

Any instances ? I know of only one instance. Usually HDFC ones are safe.

4 No comparative or comparitive evaluations of various FMPs available..lack of clarity

FMPs usually one individuals buy during NFOs. They come and go.

FD's and other govt products are never promoted by financial advisors/sites since there is hardly any sizeable brokerage they recieve from them..also advertisement revenue for there websites is generated by financial companies and not givt

Agree that there is conflict of interest

For high tax bracket...best option is "tax free bonds" / NCD from secondarry market...NPS ...
All are risk free..and good returns...

Tax free bonds window is closed. No new forthcoming. The ones available on seondary market have yield less than there coupon rate.

NCDs I guess are as risky as FMPs. NPS is a different ball game.

For high returns go for equity...don't squeeze debt instruments (and take high risk) ...its like asking a maruti to carry a truckload...

Agree. But FMP is a debt instrument so not comparable to equity from portfolio balancing purpose.

 

[milind]

Your much "hyped" tax benefits goes down the drain...

Debt Funds: Are FMPs losing their lustre? | The Indian Express

Yes FMPS come and go...and no one can complain even if they lose part of their principal amt...

I wonder why ppl mix their financial objectives...

Either play complete safe with known returns - FD's /bonds/NCD
Complete Risk ,,,Equity

Why go for intermediate products which "fool" the customers..trying to play with their emotions....no wonder "ULIP" was successful...its Indian psychology...

Also liquidity is also problem with FMPs

You don't seem to have done much research on NCD or bonds...lots of them available where returns are above the coupon rates...

Anyway each to his wishes and decision....go for FMPs...

 

[Atiker]

Your much "hyped" tax benefits goes down the drain...

Debt Funds: Are FMPs losing their lustre? | The Indian Express

Who is "your" here ? Attack the argument please and not the messenger.

The above article is good as it points both the negative and positive.
For a person in 30% bracket its better than FD. With the added advantage of no TDS and no Advance tax pay by 15th March every year. Just once at the end of 3rd year. I have invested in both FDs and FMPs, so a little aware of the hassles of both. FMPs from the stable of HDFC and Franklin evoke trust.

I wonder why ppl mix their financial objectives...
Either play complete safe with known returns - FD's /bonds/NCD
Complete Risk ,,,Equity

Its not as simple as risky or complete safe. There are others factors also in the play. Asset allocation - debt vs equity. Tax management - Short term vs long term. NCDs are not risk free.

Why go for intermediate products which "fool" the customers..trying to play with their emotions....no wonder "ULIP" was successful...its Indian psychology...

Is this moving the goal post or straw man.

Also liquidity is also problem with FMPs

Agree but not all the funds in debt bucket needs to be liquid.

You don't seem to have done much research on NCD or bonds...lots of them available where returns are above the coupon rates...

Please don't judge.
Please mention those "lots of them available" would really help.
There are criteria to ponder - ample sellers for investor to buy, transaction cost, tax repercussion due to reduced time frame, risk worthiness.

Anyway each to his wishes and decision....go for FMPs...

Really.

 

[milind]

The above article is good as it points both the negative and positive.
For a person in 30% bracket its better than FD. With the added advantage of no TDS and no Advance tax pay by 15th March every year. Just once at the end of 3rd year. I have invested in both FDs and FMPs, so a little aware of the hassles of both. FMPs from the stable of HDFC and Franklin evoke trust.


How? TDS is not there in bonds/ncd also..Advance tax to be paid on all investment...its irrelevant here....
You forgot captal gians possible in NCD/bonds...not possible in FMPS...gr8 gr8 benefit


Quote:
I wonder why ppl mix their financial objectives...
Either play complete safe with known returns - FD's /bonds/NCD
Complete Risk ,,,Equity
Its not as simple as risky or complete safe. There are others factors also in the play. Asset allocation - debt vs equity. Tax management - Short term vs long term. NCDs are not risk free.

Yes they are risk free unless you think the govt will collapse ...


Quote:
Why go for intermediate products which "fool" the customers..trying to play with their emotions....no wonder "ULIP" was successful...its Indian psychology...
Is this moving the goal post or straw man.

I am pointing how ppl in india like to keep their feet on multiple stones..and eventually fall.....


Quote:
Also liquidity is also problem with FMPs
Agree but not all the funds in debt bucket needs to be liquid.

Hmmmm...so you are gonna make FD's liquid by paying penalty ?


Quote:
You don't seem to have done much research on NCD or bonds...lots of them available where returns are above the coupon rates...
Please don't judge.
Please mention those "lots of them available" would really help.
There are criteria to ponder - ample sellers for investor to buy, transaction cost, tax repercussion due to reduced time frame, risk worthiness.

all miniscule and irrelevant.....

Yes lots of them available.....self learning is good

Quote:
Anyway each to his wishes and decision....go for FMPs...
Really.

Yes go for FMPS

1 no tax benefit
2 no fixed returns
3 no transperancy on where they invest
4 No rating or no comparitive analysis.
5 No liquidity
6 No safety

So invest in a black box....and cross your fingers and hope you will get your money back principal and interest and it is more than FD's

FMPS are now like (chit funds)..or giving money to a marwari shopkeeper...and then meeting him after 1/2/3 years and taking whatever he gives back...less or more.

gr88888