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August 2018

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Aug
20

Dear Investors,

Indian equity markets touched new highs in the month of July 2018 with S&P BSE Sensex delivering 6% returns. Performance down the capitalization curve was weak with the large cap BSE Sensex outperforming the BSE Mid Cap and BSE Small Cap. Correction in crude oil prices & stable Indian rupee during the month aided market sentiment. Mutual funds saw equity inflows amounting to Rs. 6,909 crore and debt outflows amounting to Rs. 39,537 crore in the month of July 2018, taking the industry AUM to Rs. 23.05 lakh crore (source: AMFI, July 2018).

Looking at the debt market, one of the recent key events has been the 25bps rate hike by the RBI in its 2nd bi-monthly monetary policy review, making it a second consecutive rate hike this year. The rising interest rates in the economy are making Fixed Maturity Plans (FMPs) an attractive investment avenue. If low risk and some certainty of returns is what you are looking for in your investments, FMPs might be the investment product for you, more so in the current market environment. FMPs are close-ended debt mutual fund schemes where your investments are locked for a fixed period and you get back your investments with appreciation after a specific period, similar to your traditional investments. While in traditional investments the money is with the bank, in case of FMPs, money is lent to corporates or government for a period similar to that of the maturity of the fund.

A key differentiating factor for FMPs is the lower tax rate. As per the current tax laws, long term capital gain tax i.e. (holding period of over 3 year) is 20% (plus applicable taxes) post indexation. Indexation benefit adjusts the investment value for inflation thus leading to lower taxable income. Further, as fund managers invest in securities at the time of launch of the FMP for a period equal to the maturity of the scheme, the returns of these schemes are locked in at market linked rates. FMPs are a good option for investors who wish to lock in their returns at the current market yields and aim to avoid taking a call on the change in interest rate cycles.

Though FMPs offer tax benefit and can help you lock in returns at the prevailing market yields, there are certain factors investors need to consider before selecting which FMP to invest in. Investment horizon and portfolio quality are the two important factors to consider while investing in any fixed maturity plan. Your investment horizon should align with the maturity of the fund as the money is locked in for the same period. The second factor i.e. portfolio quality is important as the funds carry credit risk. If you are a risk averse investor, a portfolio that would invest higher percentage in more creditworthy and financially stable companies is more suitable for you. FMPs being close-ended schemes are listed on stock exchanges, however they have limited liquidity.

SBI Mutual Fund (SBIMF) offers fixed maturity for both short term as well as long term. You can invest in one of the ongoing FMPs through our digital platforms viz. SBIMF website or mobile application InvesTap. You may also get in touch with your financial advisor to better understand the product or visit any of our SBIMF branches.

Warm Regards,

Anuradha Rao
Managing Director & CEO

 

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