Mutual fund companies are filing draft documents with SEBI to launch new fixed maturity plans (FMPs) to cash in on higher rates in the market. FMPs are being touted as an alternative to bank FDs. These have distinct tax advantages over bank FDs certainly for those in higher tax brackets; but FMPs cannot beat bank FDs in transparency, safety, returns and liquidity, in case of premature withdrawal. Exercise caution before you decide to invest in FMPs as your investment will be almost illiquid before maturity.
Those in the 20%-30% tax bracket can invest some part of their debt portfolio in ‘low risk’-rated (colour-code blue) FMPs with a good mutual fund house. The market, currently offers a mix of FMPs with maturity periods of three months to three years. A growth-option FMP with 366 days duration is popular as it has the benefit of long-term capital gains (LTCG) with indexation. Short-term interest rates being high will ensure good returns for 366-day FMPs. If the FMP invests in certificates of deposit (CD) issued by nationalised banks, the risk should be low.
Yields for bonds maturing over the next three years have been above 10%—higher than bank FD rates. With 10-year G-Sec yields rising after RBI’s policy review on 20th September, corporate bond yields should start getting attractive. Tata Motors’ bond is rated AA and, hence, is a higher risk than AAA rated bonds.
State Bank of India (SBI) has hiked its base rate (minimum lending rate) from 9.7% to 9.8% and revised the pricing of retail loans. SBI increased the spreads on auto and home loans by as much as 0.30% which will affect new borrowers. Home and auto loans will become costlier. The Bank has also raised its deposit rates by 0.25%-1% across maturities, due to tight liquidity. Fixed deposit (FD) rates for deposits below Rs1 crore have been revised as follows —6.50% increased to 7.50% for 7-179 days and 211 days to less than one year; from 6.50% to 6.80% for 180-210 days and 8.75% increased to 9% for deposits for one year up to 10 years.