Retirement planning is crucial, and Fixed Maturity Plans are a good retirement planning option to consider.
Fixed maturity plans (FMPs) can be a good option for retirement planning, but whether they’re a good retirement plan or not depends on a number of factors, including your investment goals, risk tolerance, and overall financial situation. FMPs typically invest in a variety of fixed-income securities, including corporate bonds, commercial papers, and certificates of deposit. The fund manager makes sure that the maturity dates of the securities correspond to the plan’s duration. FMPs with tenures of more than three years benefit greatly from tax advantages, particularly for investors in the highest tax bracket.
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When determining whether FMPs are a good retirement plan for you, keep the following things in mind:
- Low-Risk Investment: FMPs are low-risk investments that invest in debt instruments with a set maturity date. The relatively stable return they provide as a result makes them a good choice for retirement planning.
- Tax Efficiency: Because FMPs are regarded as debt funds for tax purposes, they can provide tax efficiency for investors. The tax rate on long-term capital gains from FMPs is 20% with benefits for indexation, which can help investors pay less in taxes overall.
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- Maturity Date Alignment: FMPs have a fixed maturity date, which can align with your retirement goals. By making investments in FMPs that mature around the time you plan to retire, you can prepare to get a lump sum payment that will help pay for your retirement expenses. Consider FMPs with high ratings and a proven track record of success.
- Lack of Liquidity: If you need funds during an emergency , you may need to sell your investments before the maturity , which could result in losses.
- Interest Rate Risk: FMPs invest in debt instruments, and changes in interest rates can affect their returns. A sudden increase in interest rates can negatively impact the value of the FMP, resulting in lower returns.
Most Indian consumers still consider Fixed Deposits (FDs) to park their savings for retirement, for which they need to pay taxes on the returns every year as per the tax bracket. However, in the case of FMPs, you pay long-term capital tax with an indexation benefit at the time of maturity, which in itself is a huge advantage, and the returns are comparatively stable. FMPs hold the bonds until they mature while collecting the interest due on the securities. Also, there is little or no reinvestment risk since, as discussed earlier, an FMP invests in fixed-income securities whose maturities match the tenure of the scheme.
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Retirement planning is crucial, and FMPs are a good retirement planning option to consider. However, whether FMPs are a good retirement plan or not depends on various factors, such as your investment goals, risk tolerance, and overall financial situation. It is essential to consider these factors before investing in FMPs. Consult a financial advisor to determine if FMPs are a suitable retirement planning option for you.
