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Season's Flavour: Fixed-Term Plans Offer Decent Returns & Indexation Benefits

IT'S THAT time of the year when investors go all out to save on tax and maximise returns on their investment portfolio. Keeping up with the spirit of the times, fund houses are launching longer duration fixed-term plans that will help investors pocket decent returns on their portfolio and also derive indexation benefits to save on tax. Fixed-term plans are close-ended funds bearing a maturity of 14-17 months (covering two financial years). In mutual funds, an investment held for a period of more than 365 days qualifies as a long-term investment. The tax liability in long-term debt funds is computed at 20% with indexation and 10% without indexation."People are buying fixed-term plans to derive indexation benefits. It actually helps them reduce their capital gains tax sharply," said Anil Rego, CEO, Right Horizons, a wealth advisory firm.

In indexation, the returns generated on the debt portfolio are adjusted to inflation during the holding period. Assuming the annual inflation index (released at the end of the fiscal) is 7% and the returns generated on the portfolio at the end of the term is 9%, the investor will have to pay tax only on 2% gain he has additionally made. The 7% inflation unit is set off against 7% of the gain (out of the overall 9%) pocketed by the investor. If the investment is for two fiscal years which will be the case for funds launched in February and maturing after 15-17 months, the investor is entitled to go in for double indexation (taking into account inflation for two years). This will, in effect, bring down the portion of taxable gains to barest minimum; in times of high inflation, investor going in for double indexation could also enjoy 'zero tax' on their debt investment gains.

"Being a fixed-term fund, the fund manager acquires longer dated papers consistent with the maturity of the scheme. Investors parking their money in fixed-term funds benefit from higher yields on their portfolio and also save on tax," said Suresh Soni, CEO, Deutsche Asset Management, which recently launched a 17-month fixed term plan. "An investor who goes in for double indexation in these times will have to pay negligible taxes on their portfolio returns," Mr Soni added.

Going one step ahead in maximising returns, Bharti AXA Mutual Fund has tagged along indexation benefits on its liquidity fund that transfers daily dividends from its liquid fund and treasury advantage fund to its flagship equity fund. The fund house is allowing investors to derive indexation benefits on its liquid fund and treasury advantage fund as only dividends are moved to equities market while retaining the capital in debt paper (or non-equity oriented funds). Since indexation benefit is given only on the capital portion (dividends invested in equities), the liquid fund portfolio will show a capital loss. This capital loss will be used to set off against the gains made in equity investments (the dividend portion). The fund house estimates 12-13% returns on portfolio using this strategy.

"Fixed-terms plans with indexation benefits are popular among investors; but then investors have other options as well. Investors are also looking at the debenture issues of companies like L&T and Tata Motors for profitable investments," said Akhilesh Singh, wealth management head, Emkay Global Financial Services.