QUESTION: B.C. Doley wants to know what a fixed maturity plan (FMP) is and the returns that he can expect from one. He also wants to find out the difference between an FMP and an FD. Here’s what sets the two debt instruments apart.
|FDs versus FMPs|
|Fixed deposits||Fixed maturity plans|
|Safety of capital||High||Moderate|
|Liquidity of investment||Low||High|
|Taxation of income||At normal rates||Lower rates after a year|
ANSWER: FMPs are closed-ended funds that primarily invest in bonds and fixed deposits, though some also have a small equity exposure. The maturity terms of FMPs range from one month to three years. This term coincides with the maturity of the holdings. For instance, a 12-month FMP will invest in bonds and fixed deposits that mature after 12 months. The NAV of the fund rises as the interest from bonds and investments accrues.
While fixed deposits offer assured returns, FMPs give only indicative returns. The table below compares fixed deposits with FMPs on four parameters. Right now, some FMPs are under a cloud because the non-banking finance companies and real estate firms that they invested in are not able to repay them. If this money is not recovered, the FMPs will be saddled with losses.
But FMPs are more liquid and tax-efficient than fixed deposits. An investor can exit any time during the term, though early exits invite loads of 0.5-1%. You can also break a fixed deposit, but it is more complicated.
The income from fixed deposits is added to the investor’s income and taxed at normal rates, but the gains from an FMP are treated as capital gains. If the investment is for less than a year, the gain is added to the income and taxed at normal rates. But after a year, the gains are taxed at a flat rate of 10%, or 20% after indexation benefit. This is particularly useful if the FMP extends over three financial years because the investor gets the benefit of double indexation.
QUESTION: What are the various types of term insurance plans on offer?
Shreedhar Mundhe wants to know about the term policies for different requirements.
ANSWER: Term plans are pure life insurance policies without an investment component. Since the policyholder pays only the mortality charges, the premium for a term plan is very low compared with a traditional endowment policy or a Ulip. But a term plan has no maturity value. There are several types of term plans, each catering to a specific need or financial circumstance.
• Term assurance plan: The basic term plan covers the policyholder for a fixed sum during the term.
• Increasing cover: In this plan, the insurance cover increases over the years. So one doesn't have to buy insurance at every stage of life.
• Decreasing or loan cover: This is useful if the policyholder has taken a large loan. As the loan reduces, so does the life cover.
• Single premium plan: Suited for people who have a large amount to spare at the time but are unsure of cash flows in the future. The option also lessens the risk of lapse of policy as a result of missed premiums.
• Return of premium plan: The entire premium paid is returned to the policyholder after the term ends. Not a good idea because you get only the principal and the premium is higher than that of a basic plan.
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