Most readers of my blog will know that I have had a preference for investing in FMP over the past few years. So much so, that about 45 % of my debt portfolio is invested in it. I will not go into the reasons for it in this post, if you are interested search my blog and you will see the basic logic of doing so. In simple terms, I use the capital gains from FMP for my regular expenditure and re-invest the principal in some debt instruments, FMP or not.
For indexation purposes all the schemes I currently hold in the FMP category are of duration 3 years or more. In effect this means about 1/3 of my FMP investment will get redeemed every year. In the last two financial years I had to do some rollover of schemes which were of less than 3 years. That is over now and I am able to see the full impact of my strategy regarding FMP in this FY.
One of my FMP schemes from DSP BR fund house matured in the first week of July. The facts of the investment are as follows:-
- Investment amount in the FMP was 300000, done in July 2013. Initially it was for 2 years and I had rolled it over for another year, to get indexation benefits.
- Redemption amount was 3,94,000. The CAGR of the investment was 9.51 % which is quite good, compared to the other debt options available at that time.
- As per my plan I am going to use the capital gain of 94000 for my regular expenditure and re-invest 3 lacs in some instrument.
- Based on the other FMP that will mature over this FY, I think I will be earning an overall capital gain of about 4 lacs in this year. This is about 50 % of my annual planned expenditure, not taking children’s expenses and rent into account.
So, one part of my strategy is working quite well as I get decent returns and not have to pay too much taxes on it. In a rising interest rate regime, the easiest thing would be to reinvest the principal amount in another FMP. Unfortunately, with the interest rates having come down significantly in the last 2 years and likely to go lower, this is not a viable strategy. I have looked at the different options in the debt/hybrid space and have come up with these:-
- Monthly income plans
- Equity Savings funds
- Arbitrage funds
- Short term Gilt funds
- Short term debt funds
With the interest rates being what they are, hybrid funds with a little bit of equity kicker is the order of the day currently. Also for the instruments 1-3, taxation is not going to be an issue after a year. Out of these I ruled out 1 and 2 for this week as the markets being high does not make them an ideal buy right now. I have distributed the 3 lacs equally among the other 3 categories. If in future the markets are down when I am in need to reinvest my principal amount from FMP redemption, I will choose 1 or 2.
In other words I have investments in all the above 5 categories and over a period of time the dependence on FMP will reduce in favor of these. Of course when interest rates stabilize it will again be a good time to buy FMP.
I hope this was useful for the readers and they will be able to use some of these techniques in their passive income generation.