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TIMES NEWS NETWORK R isk averse in- vestors usually look at debt funds. Other than the open ended debt schemes, there are also some closed ended debts funds that one can explore to invest. Here are some basics on two such funds: Fixed Maturity Plans (FMPs) and Capital Pro- tection Oriented Schemes (CPOS). WHAT ARE FMPS? FMPs are close ended mutual funds with a fixed term of invest- ment. Fund man- agers deploy the fund’s corpus in debt securities like bank certifi- cates of deposits (CDs), commer- cial papers (CPs), corpo- rate bonds etc. and hold these instruments till their ma- turity. Usu- ally the ma- turity dates of these in- stru- ments are equal to or less than the FMP maturity date. At the end of the term, the principal plus returns are automatical- ly redeemed and transferred to the investor’s bank ac- count. These instruments are similar to bank FDs. In FMPs the risks are slightly higher, they don’t guarantee any rate of return but the expected re- turns usually also higher than FDs. WHO CAN INVEST IN FMPS? Investors who have some ex- tra funds that they don’t need for some specif- ic period of time, should consider investing in FMPs with similar ma- turity peri- od. Given the better tax implications, if you are in the higher tax brack- et, you should consider invest- ing in FMPs with maturity of more than three years. Investors should be aware that al- though FMPs are listed, but once you in- vest in FMPs, it’s difficult to exit be- fore ma- turity since there is barely any trading in these units. WHEN TO INVEST IN FMPS? FMPs could prove to be bet- ter bets when people are not sure if the rate of interest in the economy will go up or down. In these schemes, the fund manager aims to invest in debt securities that have high yields and then stay in- vested till maturity to give the benefit of high interest inflow. For better returns you should stay invested till the maturity of FMPs. WHAT ABOUT TAX TREATMENT OF FMPS? FMPs are more tax efficient than the bank FDs mainly be- cause these funds are debt mutual funds which fall un- der tax rules different from for FDs. Investments in FMPs for more than three years come with indexation bene- fits. In comparison, FDs do not enjoy such benefits. WHAT ARE CPOS? CPOS are a special category of close ended debt schemes that guarantees that, say if you invest Rs 10,000 in such a scheme, this amount will definitely be returned to you. In addition, they also offer to return some extra money so that your final return is more than the Rs 10,000 you had in- vested. HOW DO THEY DO THAT? Suppose there is a CPOS with a 3-year maturity. The fund manager will invest a large portion of your money, Rs 10,000, in secured debt in- struments which will accrue interest for three years and at the end of three years the total corpus_value of debt in- struments and the interest accrued in them__will total Rs 10,000. The balance of your Rs 10,000 that was not in- vested in debt instruments at the beginning, is invested in say equities or other invest- ment products. So at the five year period, you have your Rs 10,000 plus the chance of some extra gain from the oth- er part of the investment. These are the funds where the debt part would give the stability to your money while the equity part would bring in ‘the kicker’, the chance to get something extra. WHO SHOULD INVEST IN THESE FUNDS? If you are an investor who is more focused on protecting your hard earned money, rather than willing to take some risks with it, then you should consider these funds. Gajendra Kothari gives a solution Insurance: The first step in financial planning is to se- cure the earning members life, so that in case of an un- fortunate early demise, the family (nominee) gets enough sum assured to take care of all mandatory finan- cial obligations. You don’t have any term insurance. What you have is an endow- ment policy. Buy a term in- surance for self. You need Rs 2 crore sum Assured. Mediclaim: You have rea- sonable medical cover. In- crease it to Rs 10 lakh over the next 3-4 year. Investments: You should have a contingency fund. If you can’t work for say 3-6 months, the basic family ex- penses can be taken care of. Based on your current monthly expenses of Rs 65,000, you should have a contingency fund of Rs 2-4 lakh. Children Education: As- suming you would need around Rs 50 lakh for your son’s PG after eight years and Rs 50 lakh for your daughter’s PG after 11 years. For this you need to fund 50% and the balance from education loan. You need to save Rs 16,000 per month for your son and for your daughter you need to save Rs 10,000 per month. Since the investment is for 8-11 years, you can invest in bal- anced fund/diversified equi- ty fund. You can expect around 12% CAGR return here. Retirement: As you need a corpus of Rs 4.5 crore in 20 years, you should start an SIP in diversified equity funds. We have linked your current SIPs of Rs 8,000 and existing MF corpus as well as your shares for the same. Additionally you should save Rs 25,000 per month and as your income increas- es, increase the SIP amount by 5% every year. Children’s Marriage: The Sukanya Samridhi Scheme (SSS) can be linked to your daughter’s wedding. Instead of monthly investment of Rs 12,500 in the scheme, if you are willing to take slightly higher risk, you can re-direct the investment to diversified equity funds or balanced funds. However, if you prefer complete safety, then continue investing in SSS. From this, in 15 years, you will have approximately Rs 47 lakh. But if you invest in MF, you would probably have around Rs 62 lakh after 15 years. House Renovation: You can start saving Rs 7,500 per month and increase the in- vestment by 10% every year in a diversified equity fund/balance fund. You could get about Rs 25 lakh from here. Set aside the ad- ditional increment in in- come for the remaining amount of the goal. Gajendra Kothari runs Etica Wealth Management INVESTOR QUERY I HAVE INVESTMENTS IN MFS, BANK FDS ETC. I AM WILLING TO INVEST MORE DUE TO GOOD PROSPECTS IN THE COUNTRY. I WANT TO KNOW ABOUT LONG TERMS INVESTMENT WHICH ARE TAX FREE, IF YES WHAT IS THE MAXIMUM DURATION. I NEED ONE PAYMENT OPTION OR ONE WITHDRAWAL OPTION YEARLY. Rajiv Vaze, via email Ashish Modani replies Dear Rajiv: Before I go about talking of various options that you have for your investments, I would recommend you to first lay down the purpose of your investments as it eases out the process of choosing the right investments for you. You mentioned that you have investments in FDs and MFs and would like to make some long term investments as recently the overall scenario looks good to you. For long term investments equities are the best bet. But if you are planning to invest just because the overall scenario is good, then I would recommend you not to go for the same as the scenarios are subject to change and with this your strategy might also undergo change. Equities are the best tools for wealth creation but that happens only in long term i.e. if you have a horizon of at least 10-15-20 years. Contrary to this if you are considering to make long term investments for your retirement, kid’s future or some other purpose where you have at least 10-15 years before the goals arrive, then I would recommend you to go for equity funds. As far as funds are concerned you may go for funds that invest in frontline stocks or midcaps. Apart from this, have some component of debt as it would give you cushion in tough times and would keep the portfolio under check. As far as taxation is concerned, it is only an added advantage you can get but taking a decision based on an instrument’s tax efficiency is not the right thing to do. Though you mentioned that you need an option for one time investment, but I would suggest you to start an SIP as it inculcates the much needed discipline in investing and never lets you skip the savings. You may find it boring but in the end it would get the job done. Ashish Modani runs SLA Investments, Jaipur ‘Increase your SIP amount every year as earnings rise’ NEXT EDITION In our next edition we will deal with the basics of investing in income funds and credit opportunities funds, a category of debt funds which carry relatively higher risks. DEMYSTIFIER These schemes offer better returns over traditional fixed income instruments like FDs, enjoy better tax treatment when invested for more than three years FMPs, CPOS Are For Low-Risk Investors CASE STUDY I am self-employed, 40 years old. We have two kids, son (14) and daughter (10). My monthly take home is Rs 1.5 lakh and expense is Rs 65,000. I have a credit card limit of Rs 2.75 lakh. We live in an owned house. I need Rs 40 lakh after 10 years to renovate it. My current investments are: One Sukanya Khata of Rs 12,500 per month, current worth Rs 1.10 lakh, Four monthly SIPs aggregating Rs 8,000 with the current value of about Rs 3 lakh, direct share investments worth Rs 3.5 lakh. We have a family-floater mediclaim of Rs 8 lakh and a regular life insurance policy for myself. Goals: Rs 1 crore in 5-10 years for the children’s education, Rs 1.5 crore for the children’s marriage in 10-15 years, and retirement fund of Rs 4.5 crore in next 20 years. Let me know how and where I should invest to maximise my savings. Parth Sharma, by email HOW RBI MANAGES RUPEE FROM WEAKENING AND YET MAINTAIN LIQUIDITY IN THE DOMESTIC MARKET IN TIMES OF VOLATILITY? Swatantra Kumar explains: Whenever there are situation like last week’s post-Brexit session on Friday, as foreign investors sell Indian assets like stocks and bonds, convert the rupee they get into dollar to take it out of the country. This in turn makes rupee weak and dollar strong. In such situations RBI supplies dollar in the forex market so that supply meets demand, and receives rupee funds in exchange for dollars. Since rupee funds in the domestic market declines, in the domestic market RBI buys government securities from local banks and pays them in rupee (called open market operations, or OMO). This way RBI supports the currency and also maintains liquidity in the domestic market. An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Benjamin Graham author and Warren Buffett’s teacher GURU SPEAK FMPs > Investment horizon and fund’s duration should match > Mimics bank FDs of similar duration > Risk of loss is very low > Only indicative return, not guaranteed > Better tax efficiency when invested for over 3 years > Low expense ratio CPOS > Investment horizon and fund’s duration should match > FMPs + Equity kicker (Bank FDs + higher returns + Equity kicker) > Risk of loss is very low, extra returns could suffer if equities don’t do well > Initial investment is protected > Better tax efficiency when invested for over 3 years > Low expense ratio ILLUSTRATIONS: SACHIN VARADKAR HERE ARE SOME SALIENT FEATURES OF FMPS AND CPOS THE TIMES OF INDIA, MUMBAI TUESDAY, JUNE 28, 2016 13
