Fixed Maturity Plans – What are Fixed Maturity Plans?

WHAT ARE FIXED MATURITY PLANS?

Fixed Maturity Plans are schemes that invest in fixed income instruments like commercial paper, bonds among others. Fixed Maturity  Plans are generally close-ended mutual funds with a fixed time period which can range from 30 days up to 5 years. These plans cannot be closed or withdrawn before the completion of maturity. They also come with a predetermined return rate and hence help investors to calculate how much returns they can expect after maturity. FMPs are low-risk investment schemes as they don’t depend on the stock market fluctuations for their returns. Moreover, due to their close-ended nature, investors cant invest in these at any point in time. Funds can be invested when the mutual fund is open and announced. Hence, this makes it an efficient and simple investment tool.

WHERE DO FMP INVEST FUNDS?

FMPs invest in debt-based fixed maturity investment alternatives like money market instruments, bank FDs, corporate bonds, CDs, CPs, and so on. For example, if the maturity of an FMP is 3 years, it will invest in maybe bonds or CPs which have a maturity period of 3 years. Unlike other types of debt funds where the fund managers keep adjusting their portfolios, FMPs require zero to minimum adjustments once the funds are invested. 

ARE THE RETURNS GUARANTEED?

No, unlike bank FDs where investors receive the exact interest mentioned on their FD certificate, the returns from FMP in mutual funds are indicative. The fund house only mentions approximate indicative returns at the time of the New Fund Offer. But the return can be lower or higher at the time of maturity. In maximum cases, there is only a slight difference in the actual and indicative returns of FMPs.  

CHARACTERISTICS OF FMP

1. Investment Strategy:

FMPs invest in fixed income instruments like CDs, CPs, money market instruments, etc, or in securities issued by the government, maturing in line with the tenure of the scheme.

2. Closed-ended funds:

Since these are close-ended plans, an investor can invest only during the NFO  and redeem only at the time of maturity of the respective series under the plan. However, unitholder holding units in dematerialized format can close by selling their units on the exchange where units of an FMP scheme are listed.

3. Fixed Tenure:

Investors can choose the FMPs that match their cash flow requirements and investment horizon as per their feasibility and convenience. 

4. Low credit and liquidity risk:

FMPs usually invest in highly rated credit instruments with a maturity of the invested securities in line with the scheme maturity. So there is minimum liquidity risk involved with low credit risk.

5. Portfolio Balancing:

FMPs are market-neutral products that endeavor to offer the investors stable and decent returns for the investment period. Therefore, they find takers across the investor base spectrum.

WHY FMPs OVER FDs?

If the FMPs do not provide guaranteed returns, then why do intelligent investors opt and consider them over bank fixed deposits. One of the biggest rationales is taxation.

With FDs, the interest income is taxed as per the income tax slab. So someone in the tax slab of 30% will have to pay 30% taxes on the income on FD. This makes FDs a non-tax-efficient option. As FMPs are a type of debt mutual fund, they are taxed like any other debt fund. Investments held for more than 3 months are taxed at a 20% rate. But there is also indexation benefit available. With indexation, investors get to increase the purchase price of FMP units in line with the inflation during the investment tenure. This helps in reducing the taxable returns of investors.

It is because of this reason that FMPs with a maturity of three years and more are currently in talks. But in case if investors opt for an FMP with a maturity of fewer than three years, the returns will be clubbed to taxable income and taxed as per the applicable tax slab identical to the bank FDs. 

WHY INVEST IN FMPs?

FMPs, when compared to bank FDs are historically known to deliver high returns. But as discussed, returns are not guaranteed. But these are still an excellent choice for anyone looking to park their surplus funds for a fixed tenure of one month to five years and earn more return than Fixed Deposits. Even long term risk-averse investors who do not want linkage to market volatility and fluctuation of equity funds can opt for one of the top FMPs. 

Before investing, investors must note that FMPs are close-ended schemes and investors will mostly not be able to redeem investments before the maturity period.