What are fixed maturity plans (FMPs), and what do their series mean?
FMPs are closed-end debt funds. That means, they are funds in which an investor can invest only at the time of a new fund offering (NFO), and take out the money at the time of maturity. This is as opposed to open-ended funds where investors can invest any time and take the money out at any time as well. FMPs invest in debt instruments of fixed maturities, mostly tallying with the time frame of the fund itself. That is, if the fund’s time frame is 3 years, then the maturity of the underlying debt securities are also, on an average, likely to be 3 years.
Investors can look at these funds as mutual fund industry’s offerings that are equivalent to bank fixed deposits (FDs), although returns from FMPs are not guaranteed by mutual funds like FD returns are guaranteed by banks.
The series numbers on FMPs are internal nomenclature for the fund houses and do not carry any meaning or significance for investors. They are simply a serial number notation to label these offerings and distinguish them from one another.
Say, I invest Rs100 in MF A and start a systematic transfer plan (STP) of Rs10 every month to MF B, and both appreciate over time. How is the investment and current values calculated every month for both schemes?
An investor would need the investment (cost) value and the current value of a holding for two different purposes—one, to find the internal rate of return (IRR) of the investment (how the fund is performing), and two, at the time of filing tax returns, to identify short- and long-term capital gains. For both, the calculation of the two values works out the same way. When you do an STP, each switch out from MF A is treated as a redemption transaction and each switch in into MF B is treated as an investment transaction. Both sets of transactions can then be seen as an isolated series of actions performed on just one scheme at a time.
To calculate the IRR of MF A, you would count your original investment as inward cash flow, the switch-outs as outward cash flow, and the current value (calculated as today’s net asset value or NAV multiplied by remaining units) as present value. Similarly, for MF B, each switch-in would be an investment transaction and the current value as present value. When it comes to tax calculation, the first-in, first-out (FIFO) method of cost calculation will apply to determine the cost value of the units switched out from MF A. So, at the time of the end of a financial year, you will have some units left in MF A, and the remaining units would have been redeemed at the total value of the switch out amounts. The difference between the two would give you the capital gains realized.
In the case of MF B, at the time of redemption, you can determine the realized capital gains by averaging the cost of acquisition over multiple switch-in transactions. Such calculations are very difficult without the aid of a tool like a spreadsheet on a computer. It would be better still to rely on specialized returns and gains calculators.
Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com
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