We are in the month of March and the mutual fund market is flooded with new fund offers from almost all the leading asset management companies. Most of these are closed ended debt oriented plans with tenure of three years and above.
The reason? March is the best month to invest to maximize the indexation benefit (one of the most powerful tax planning/saving tool) on debt investments and technically earn a tax free return.
How it works –
Indexation benefit can be availed on any debt oriented investment (fixed deposits are excluded) which is held for a period of a minimum of three years and it enables one to adjust the cost price of the investment to account for inflation over the period of holding. (It can also be applied on capital gains from real estate transactions, but the current post focuses only on debt schemes only). Use this link for a detailed working on how it is applied –
Most of the schemes which are currently on offer this month – March 2015 are structured in such a way that they mature sometime in or after April 2018.So, though the actual tenure/holding period is a little over 3 years, the investment spans 5 financial years – FY 2014-2015 (The year the investment was done), FY 2015-2016, FY 2016-2017, FY 2017-2018 and FY 2018-2019 (The year the investment matures).
So, by investing for 3 years, one can adjust the returns for inflation for 5 years! The most popular schemes to which this can be applied are the Fixed Maturity Plans, also known as FMPs. These are 100 % debt oriented and are comparable to fixed deposits as far as safety of principal is concerned, but are highly tax efficient, unlike fixed deposits where the entire interest is taxable as income . The indexation benefit concept can also be applied to another debt oriented mutual fund category called capital protection oriented plans, but these have a limited exposure to equity also and though they seek to protect the capital, the returns are market dependent. (For more details visit – https://srirakshafp.com/2012/10/04/capital-protection-oriented-funds-a-safe-bet-in-uncertain-times/)