Things to look for before rolling over a fixed maturity plan
Finance minister Arun Jaitley's big message to mutual fund investors in his maiden budget was "don't invest in mutual funds just for tax arbitrage". That the finance ministry over-reached its objective of plugging the tax loophole of institutional investor's taking the benefit of this tax arbitrage in debt funds, by far, is fairly obvious. In his reply to the debate on the Finance Bill in Parliament, the finance minister seemed to indicate that the retail mutual fund investor is just collateral damage in this exercise of stopping institutional investor's taking advantage of tax arbitrage.
Though all categories of non-equity-oriented mutual funds, i.e. liquid funds, debt funds, gilt funds, gold funds, international funds and fund of funds, have been affected due to the change in tax structure, the category that needs immediate attention is fixed maturity plans (FMPs) with holding period between one year and three years for two reasons. First, it has a defined redemption date within the affected bucket period and second, fund houses have started the rollover process of the FMPs coming up for maturity.
What exactly does the rollover of FMPs mean for the investor? Rollover of an FMP is simply the extension of the maturity period of the FMP to take its holding period beyond three years. For example, if you had invested in a one-year FMP maturing on 1 August 2014, the mutual fund now gives you an option to extend the maturity date to 1 August 2016 so that you are not taxed at a higher tax slab compared with what you had originally planned.
The rollover is an opt-in process and you, as an investor, need to specifically give a written consent to extend the date of maturity before the cut-off date as communicated to you by the fund house. If you do not give your assent for the rollover, then your maturity proceeds will be redeemed on the original maturity date.
This is an option that every FMP investor should consider. However, apart from tax benefits there are four other factors you should consider before deciding whether to rollover or not.
Portfolio quality for the rollover period
Most of the one-year FMPs which are due to mature now had a mandate to invest in an extremely high quality bank certificate of deposit portfolio, or AAA-rated debt portfolio. Remember that the same portfolio will not continue. The fund house in its communication to you about the rollover will mention the new investment pattern.
Some FMPs getting rolled over now are changing the investment pattern to investments in AA or equivalent rated non-convertible debentures and bonds. Since your are now committing your funds for an additional two years, be sure to check if you are comfortable with the new investment pattern and the credit rating quality of the new portfolio.
Assets under management (AUM)
As per Securities and Exchange Board of India (Sebi) guidelines, every FMP rollover will need to conform to a minimum AUM of Rs.20 crore in the rollover period. If the FMP is not able to retain the minimum AUM in the rollover, then the FMP will be compulsorily redeemed on the original maturity date even if you have opted for the rollover. Thus, if you are invested in an FMP which had an original corpus of Rs.50-100 crore, the probability of it devolving are fairly high and you may need to plan accordingly. Concurrently, Sebi guidelines of minimum 20 investors and not more than 25% holding by a single investor will also need to be followed post rollover. Large investors continuing can force the fund house to redeem the FMP on the original maturity date even if you opt for the rollover.
Liquidity
If you opt for the rollover, you should remember that you are locking in your funds for the entire duration of the rollover period. FMPs offer liquidity only through listing on the stock exchanges and currently the trading of FMPs on stock exchanges is negligible. This effectively means that you have no exit option during the lock-in period. Hence you should be fairly certain that you will not require these funds during this extension period and only then should you consent for the rollover.
Expense structure for the rollover period
The expense ratio for an FMP during the rollover period may not be the same as the earlier period. Most of the one-year FMPs had an expense ratio of 10-25 basis points (bps). In the communication sent to you for the rollover, the fund house will mention the indicative expense structure during the rollover period. In an FMP, the expense structure plays a very critical role on net returns. If the annual expense structure is now higher than 40-50 bps, it may result in lower returns to you during the extension period. Take a considered call on what impact the new expense structure may have on your net returns and whether it will be beneficial to continue with the rollover or pay the tax now and redeem.
Though, most of the times, it will be beneficial to rollover your FMP due to tax benefits, do take into consideration all additional factors while deciding on whether to rollover or not.
LIvemint
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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Though all categories of non-equity-oriented mutual funds, i.e. liquid funds, debt funds, gilt funds, gold funds, international funds and fund of funds, have been affected due to the change in tax structure, the category that needs immediate attention is fixed maturity plans (FMPs) with holding period between one year and three years for two reasons. First, it has a defined redemption date within the affected bucket period and second, fund houses have started the rollover process of the FMPs coming up for maturity.
What exactly does the rollover of FMPs mean for the investor? Rollover of an FMP is simply the extension of the maturity period of the FMP to take its holding period beyond three years. For example, if you had invested in a one-year FMP maturing on 1 August 2014, the mutual fund now gives you an option to extend the maturity date to 1 August 2016 so that you are not taxed at a higher tax slab compared with what you had originally planned.
The rollover is an opt-in process and you, as an investor, need to specifically give a written consent to extend the date of maturity before the cut-off date as communicated to you by the fund house. If you do not give your assent for the rollover, then your maturity proceeds will be redeemed on the original maturity date.
This is an option that every FMP investor should consider. However, apart from tax benefits there are four other factors you should consider before deciding whether to rollover or not.
Portfolio quality for the rollover period
Most of the one-year FMPs which are due to mature now had a mandate to invest in an extremely high quality bank certificate of deposit portfolio, or AAA-rated debt portfolio. Remember that the same portfolio will not continue. The fund house in its communication to you about the rollover will mention the new investment pattern.
Some FMPs getting rolled over now are changing the investment pattern to investments in AA or equivalent rated non-convertible debentures and bonds. Since your are now committing your funds for an additional two years, be sure to check if you are comfortable with the new investment pattern and the credit rating quality of the new portfolio.
Assets under management (AUM)
As per Securities and Exchange Board of India (Sebi) guidelines, every FMP rollover will need to conform to a minimum AUM of Rs.20 crore in the rollover period. If the FMP is not able to retain the minimum AUM in the rollover, then the FMP will be compulsorily redeemed on the original maturity date even if you have opted for the rollover. Thus, if you are invested in an FMP which had an original corpus of Rs.50-100 crore, the probability of it devolving are fairly high and you may need to plan accordingly. Concurrently, Sebi guidelines of minimum 20 investors and not more than 25% holding by a single investor will also need to be followed post rollover. Large investors continuing can force the fund house to redeem the FMP on the original maturity date even if you opt for the rollover.
Liquidity
If you opt for the rollover, you should remember that you are locking in your funds for the entire duration of the rollover period. FMPs offer liquidity only through listing on the stock exchanges and currently the trading of FMPs on stock exchanges is negligible. This effectively means that you have no exit option during the lock-in period. Hence you should be fairly certain that you will not require these funds during this extension period and only then should you consent for the rollover.
Expense structure for the rollover period
The expense ratio for an FMP during the rollover period may not be the same as the earlier period. Most of the one-year FMPs had an expense ratio of 10-25 basis points (bps). In the communication sent to you for the rollover, the fund house will mention the indicative expense structure during the rollover period. In an FMP, the expense structure plays a very critical role on net returns. If the annual expense structure is now higher than 40-50 bps, it may result in lower returns to you during the extension period. Take a considered call on what impact the new expense structure may have on your net returns and whether it will be beneficial to continue with the rollover or pay the tax now and redeem.
Though, most of the times, it will be beneficial to rollover your FMP due to tax benefits, do take into consideration all additional factors while deciding on whether to rollover or not.
LIvemint
Thanking you
Regards,
Rajesh Kumar Kathpalia ¤ SMC Global
17,Netaji Subhash Marg,Daryaganj,
New Delhi-110002 Mobile No 9891645052
Email Id: rajesh.ipo@smcindiaonline.com
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