Fixed Maturity Plans offer better returns than Fixed Deposits

Fixed maturity plans (FMPs) offer investors the twin benefits of investment and tax savings. Not so popular among investors, FMPs are a fixed tenure, closed-ended mutual fund (MF) scheme with characteristics similar to that of a bank fixed deposit (FD).


Under an FMP, funds are invested at the time of initial offer for a stipulated time and can be redeemed only at the end of the lock-in period. Usually misunderstood to be equitylinked schemes, FMPs are, in fact, pure-play debt funds. Funds under FMPs are invested in debt and moneymarket instruments including corporate bonds, commercial papers and certificates of deposit, etc and in government securities as well.

FMPs are issued with different maturity periods like three or six months or one, two and three years. What makes FMPs different from FDs is the return profile and tax treatment. Return profile

FD’s Unlike FDs, returns are not guaranteed under FMPs. FMP offers an indicative return, also known as the indicative yield. It is based on the returns offered by the underlying financial instruments that FMP invests into and tends to vary from the actual returns at the time of maturity.

FMPs are more suitable to investors with higher risk profile. To compensate for the inherent risk, FMPs offer relatively higher returns. Further, even though returns are not fixed, FMPs do offer a greater liquidity to investors as they can trade on exchanges.
 
Tax Treatment


FMPs differ significantly from FDs and offer a higher flexibility to investors when it comes to tax on returns. Unlike FDs, wherein the interest income is taxed as per the investor’s tax slab, the tax treatment for FMPs depends upon two options: dividend or growth.

The dividend options of FMP scheme attract 12.96% dividend distribution tax (DDT), which is deducted at the source. Returns from the growth option are subject to capital gains tax, which can be either short term (STCG) or long term (LTCG) depending on the tenure. If an FMP is sold within a year of purchase, STCG tax would be charged based on the existing tax slab for the investor.

For tenure higher than that, LTCG tax depends upon whether the investor opts for indexation or not. LTCG without indexation attracts 10.3% tax whereas it is 20.6% under indexation.

The power of indexation Indexation is a mechanism that allows the investor to adjust the return rate of an FMP-growth instrument for the rate of inflation during the tenure. It is a powerful tool that makes FMPs more lucrative than FDs.

In an economy where inflation grows faster than FMP’s annual rate of return, indexation results into a lower tax outgo even though its stipulated tax rate is twice that of FMP without indexation. Investors can also use the facility of double indexation to reduce the tax impact further.

In cases where FMP tenure exceeds 12 months, double indexation arise, since the rate of inflation is calculated not once a year but over two years, which results into a higher indexation rate in an inflationary economy such as India.

The table offers more clarity on double indexation wherein the rate of inflation is calculated over the two years ending FY11. Also, in case of post indexation long-term capital loss (LTCL), the investor can adjust the loss against LTCG. For example, in the table, the third case shows a post indexation loss of Rs 11,429.

This amount can be adjusted against LTCG from any other investment thereby reducing the overall tax payable

What You Should Do

Investors, who can bear a relatively higher risk, should prefer FMPs to bank FDs. Those looking for a short term investment option should pick FMP-dividend, as it attracts less tax. However, long term investor should ideally go for FMP growth. Further, it attracts the benefit of double indexation for the maturity between 12 months and 24 months, which may reduce the overall tax outgo on investments. Investors, who require assured returns, should, however, opt for FDs.

Safe Investment Method

Investment in Infra Bonds is Safe(updated - 06 Mar 2011)Given the coupon rates and tax breaks, investment in these bonds would be a good option


At a time when markets have been volatile with a downward bias, infrastructure bonds offer the dual benefit of a safe haven and reasonably good returns. While there are some limitations, the annualised returns can be as high as 15 per cent a year, assuming that an individual investor who falls in the highest tax bracket, has not exhausted his/her tax benefit under Section 80CCF, and is able to exit at the end of the fifth year.

What’s on offer

As 2010-11 bids adieu, individual tax payers are scouting for avenues to limit their tax liability. There are a host of companies including L&T infrastructure, IDFC, Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and India Infrastructure Finance Company (IIFCL), which have come out with infrastructure bonds, offer to raise money for financing the country’s infrastructure projects (see table).

A quick look at the bonds on offer reveals that the rate of interest ranges between 8 and 8.50 per cent. Of these, the lowest is for REC, while PFC leads the pack with rates of up to 8.50 per cent on cumulative investment for 15 years and 8.30 per cent on non-cumulative option for 10 years.

These bonds have a minimum lock-in period of five years. After which, they will be available for trading on the country’s leading stock exchanges namely, the BSE and NSE. Some companies are also providing an option to buyback these bonds at the end of the fifth year.

For the individual, he or she can save a maximum of Rs 6,180 in terms of tax outgo for the fiscal year ending March 2011. This is assuming the maximum investment of Rs 20,000 which is eligible for benefit under section 80CCF and highest tax rate of 30.9 per cent. Among other options and based on preferences, individuals can choose to invest in a 10-year or a 15-year bond with options of accumulating interest income till maturity or availing it every year.

The best option

The yields on each of the bonds currently on offer are different, thanks to their different offer opening dates. As per the regulations, the rate of interest on these bonds cannot exceed the yields on government securities having similar maturities, 30 days before the issue opens.

So, which is the best option currently? Kartik Jhaveri, a certified financial planner (CFP), says, "The rate of return on these bonds is in the range of 8-8.5 per cent. At 8 per cent the net return (post tax) is 5.50 per cent for a tax payer in the highest bracket. These bonds are more beneficial to people in the 20-30 per cent tax bracket. The ideal option to invest in would be a scheme with the highest coupon rate and an AAA rating".

IDFC Premier Equity Fund

The fund was launched at the end of 2005.


IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes. While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows.

Thus, while an investor can always take the systematic investment plan (SIP) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for lump-sum investments only thrice so far - June 2006, October 2007 and January 2010 for a brief while only. It has now been opened for lumpsum investments once again in April 2011, but again for a brief period only.
 
Returns


The fund strictly adhering to its philosophy of "buying cheap but good, and selling high", this fund has zipped past performance of many other well-established schemes in the category by distinctive margins.

It zoomed past the 63% gains by its benchmark index - BSE 500 - by an overwhelming 111% in 2007. Then again, it succeeded in restricting its fall to about 53% against BSE 500's 58% in the meltdown year of 2008.The recovery era of 2009 saw the fund at its best once again, delivering 102% against BSE 500's 90% while last year despite extreme volatility on the Indian bourses, the investors of IDFC Premier Equity reaped a handsome 32% gain as against BSE 500's 16%. Thus, so far, since the time of its launch, this scheme has enriched its investors by more than 226% absolute gains against 112% absolute returns by BSE 500 during the same period. This implies that every Rs 1,000 invested in IDFC Premier Equity in September 2005 has grown to about Rs 3,263 today.
 
Portfolio


It is rare to find extremely popular and well established scrips in the portfolio of IDFC Premier Equity. One can, however, definitely hunt for companies currently available cheap, but which have good growth potential and revenue earning visibility.

IDFC Premier Equity was one of the very few schemes to pick up the then nonperforming stocks like Bata India in 2008. Similarly, it was one of the few schemes to foresee the embedded potential in the initial public offers (IPO) like Page Industries. Such stocks like Bata and Page have turned out as multi-baggers for the fund. Some of its other astute and timely picks include Motherson Sumi, Glaxosmithkline Consumer Healthcare , Bluedart Express, IRB Infrastructure, Coromandel International, Shriram Transport Finance and Asian Paints.

Each of these scrips was picked at extremely cheap valuations way back in 2008-09 and has reaped remarkable yields for the fund so far. Returns

The fund strictly adhering to its philosophy of "buying cheap but good, and selling high", this fund has zipped past performance of many other well-established schemes in the category by distinctive margins.

It zoomed past the 63% gains by its benchmark index - BSE 500 - by an overwhelming 111% in 2007. Then again, it succeeded in restricting its fall to about 53% against BSE 500's 58% in the meltdown year of 2008.The recovery era of 2009 saw the fund at its best once again, delivering 102% against BSE 500's 90% while last year despite extreme volatility on the Indian bourses, the investors of IDFC Premier Equity reaped a handsome 32% gain as against BSE 500's 16%. Thus, so far, since the time of its launch, this scheme has enriched its investors by more than 226% absolute gains against 112% absolute returns by BSE 500 during the same period. This implies that every Rs 1,000 invested in IDFC Premier Equity in September 2005 has grown to about Rs 3,263 today. (Updated - 20 April 2011)Welcome to Indian Share MarketYour Desire to EarnResearched Stocks Free Technical Charts Readers Our Target Demat A/C Opening Contact us Home page Get Free Advice Useful Sites Free Subscription The fund manager appears to be on a hunting spree once again as the fund's latest portfolio is loaded with a good number of new picks. These include Globus Spirits, Tilaknagar Industries, United Spirits , Whirlpool, Bajaj Electrical, Kaveri Seed, Gujarat State Petronet, P&G Hygiene & Healthcare, Nilkamal, PTC, Arvind and Cox & Kings.

A high exposure to an otherwise defensive FMCG sector is clearly evident and this, once again, signals the fund manager's investment approach of sailing against the tide.

Despite Banking and Financials being the most sought after sectors currently by most mutual fund schemes, IDFC Premier Equity prefers to stick to its reflexes and has opted for FMCG instead.

PROJECT FINANCING

Project Financing is a unique financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Euro Tunnel. Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide.


Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.
 
The main challenges of financing large-scale projects Projects like power plants, toll roads or airports share a number of characteristics that make their financing particularly challenging. First, they require large indivisible investments in a single-purpose asset. In most industrial sectors where project finance is used, such as oil and gas and petrochemicals, over 50% of the total value of projects consists of investments exceeding $1 billion. Second, projects usually undergo two main phases (construction and operation) characterised by quite different risks and cash flow patterns. Construction primarily involves technological and environmental risks, whereas operation is exposed to market risk (fluctuations in the prices of inputs or outputs) and political risk, among other factors.4 Most of the capital expenditures are concentrated in the initial construction phase, with revenues instead starting to accrue only after the project has begun operation.
Third, the success of large projects depends on the joint effort of several related parties (from the construction company to the input supplier, from the host government to the off-taker5) so that coordination failures, conflicts of interest and free-riding of any project participant can have significant costs. Moreover, managers have substantial discretion in allocating the usually large free cash flows generated by the project operation, which can potentially lead to opportunistic behaviour and inefficient investments.

Investing in Silver

Silver, in comparison with Gold

Jim Rogers, the biggest commodities expert, said a few months ago that Silver is one of the very few safe refuges left for investment. Robert Kiyosaki, of Rich Dad Poor Dad fame, believes the same.

Today, Silver is trading at close to 40,000 per kilogram and Gold is at closer to 20,000 per 10 gram. If we look at the returns from Gold and Silver in last year, Silver gave returns of more than 40% while Gold gave over 25%. In fact in last 5 years, Silver has given CAGR of 27% while Gold has given CAGR of 23%. Here the quality of Silver taken for reference is 999.9 and quality of Gold is 99.50.

Gold and Silver rates

There is a useful ratio, used by Bullion trader & investors, between Gold and Silver prices. Today the ratio is 50. There is a general perception that this ratio is on the higher side and hence the scope of further appreciation in Silver prices may be limited. At the same time, few people point to the fact that this ratio has even gone to 20 in past and hence there is scope for appreciation.

Unlike Gold, which doesn't have much use, the major consumption of Silver is in industry and this is what makes Silver more attractive.


Avenues for investment

Investors can buy Silver coin and Silver bar from open market, bullion traders such as MMTC, or banks as they have been doing since long. Silver is cheaper and hence many people can invest in it. A 10 gm. coin can be bought for as little as Rs. 300-400. You have to be careful about the grading quality when you buy Silver. A few points of difference in grading can make huge differences in price. Usually anything above sterling grade (grade 925) is considered good.


Recently, because of increased interest in Silver as investment vehicle, the National Spot Exchange Limited (NSEL), an electronic spot market exchange for commodities, has introduced e-Silver as an investment avenue from 21st April, 2010. This facility allows investors to buy Silver in dematerialized form. The trading session is from 10:00 AM to 11:30 PM and hence investors can do it at their convenience. Investors can buy in the lot of 100 dematerialized units of e-Silver which is equivalent of 100 gm. of Silver.


The investors may choose to sell the e-Silver whenever they want and get the cash or may take delivery in physical form from any of the NSEL designated centres. Currently the centres are there in Mumbai, Delhi, and Ahmadabad and will soon be opened in major cities across India.

Pointers to keep in mind

Silver is not as stable an investment as Gold. The returns have been shown to be better than gold in long term but the risk is also high. The swing in price of Silver is much wider than the Gold.


The other point to keep in mind is current price of Silver. Silver has experienced a dream run in last few years. This has raised the expectation of investors. Don't go by the stories in media and keep your expectation reasonable. The returns may moderate in future.

When you buy Silver in physical form, buy from reliable jewellery or banks.


Lastly, Silver (or Gold) is, at the end of the day, an asset which does not produce earnings. You can make money only when you liquidate them. Unlike equity investment, where you can take the call on the stock price based on earnings, Silver (or Gold) do not provide this clarity. Invest for long term and possibly in a systematic way to maximize your returns.