Optimise safe earnings with Fixed Maturity Plan (FMP)

Want a fixed investment term? Discover Fixed Maturity Plans now and find out the pros and cons of investing in them.

The words ‘fixed’ and ‘maturity’ usually make people think of debt investments, where the returns are known in advance and will be paid off at a specific date.

The wide variety of mutual fund schemes available in India is a contributing factor to its rising popularity today. For example, a Fixed Maturity Plan (FMP) might be a good option if you’re a careful investor seeking a plan with a set investing period.

In this article, we will talk about what FMPs are in mutual funds and the pros and cons of investing in them. 

What is FMP in mutual funds?

What is Fix Maturity Plan?

A closed-ended debt fund with a set lock-in term and a limited investing period is called a fixed maturity plan. In contrast to other types of open-ended debt funds, FMPs do not have an ongoing subscription period. 

A fund house will announce a New Fund Offer (NFO) with a start and end date. Throughout the NFO, the opportunity to invest in FMP will remain briefly available; after that, no new investors can buy fund units from the AMC. 

Debt instruments, including money market instruments, corporate bonds, bank fixed deposits, etc. are common investments for FMPs. When managing the fund, the manager invests in instruments with similar desired maturity periods.

For example, the fund manager may invest in a corporate bond with a five-year maturity if the FMP is set for five years.

Some of the examples of FMP mutual funds are SBI Fixed Maturity Plan (FMP) – Series 34 – Direct Plan-Growth, ICICI Prudential Fixed Maturity Plan – Series 85 – 10 Years Plan I – Direct Plan-Growth, and Kotak FMP Series 308 – (1125D) – Direct Plan-Growth, among others.

Features of a fixed maturity plan

Fixed lock-in period

Plans with fixed maturities have a set lock-in period during which investors cannot withdraw funds out of the plan. Such strict withdrawal limitations are primarily intended to guarantee that the deposit is locked in for the specified time frame and maximise profits from the underlying assets.

Portfolio risk

The only assets that are invested in by FMPs are fixed income-generating securities, such as government securities and others.

Since the effects of stock market movements on debt instruments are less prominent, fund managers develop a portfolio like this to guarantee that the overall corpus carries less risk.

High-quality assets

When creating a corpus to create a fixed maturity plan that yields the maximum returns, portfolio managers typically use debt instruments issued by reputable companies. This further lowers the risk element attached to the product, making it among the most secure stock market tools out now. 

Pros and Cons of fixed maturity plan

Pros of FMP in mutual fund

A fixed maturity plan investment has several advantages, such as:

Less risky

Since it focuses mostly on the debt securities of well-known listed corporations that operate in a nation, a fixed maturity plan is among the safest options for investing. As a liability, debt instruments are paid off first from a business’s annual revenue.

Additionally, these fixed-maturity mutual funds have excellent credit ratings determined by the nation’s leading credit rating organisations, confirming the scheme’s credibility.

Stable returns

Debt instruments are comparatively less vulnerable to changes in the stock market. Additionally, bonds gain value during recessions as investors move to less hazardous investments, enabling people to get large returns on their investments.

Indexation benefit

Debt mutual funds, such as FMPs, get indexation benefits but are liable for a 20% long-term capital gain (LTCG) tax if liquidated after three years from the initial date of acquisition.

The indexation benefit means accounting for inflation and reducing taxable capital gains. Thanks to this feature, investors can modify the fund’s purchase NAV following the rate of inflation in the country. You may be able to lower your tax bill by enjoying the indexation benefit. 

Cons of FMP in mutual fund

Relatively lower returns

Because the return percentage does not change during the entire duration of the investment, fixed maturity yields are relatively lower. Additionally, investors lose out on favourable market prices’ cyclical movement since interest income for these plans stays the same.

Less flexibility due to the lock-in period

Participating in a fixed maturity plan means that you cannot take partial withdrawals from the principal throughout the designated term. This might make investors’ needs for liquidity more difficult.

Conclusion

Conservative investors seeking fixed-term investments with predictable returns may find FMPs a good fit. However, like with any investment, research is essential, and investors should choose FMPs based on their risk tolerance and financial objectives. 

DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.

FAQs

  1. Which is better FD or FMP? 

    FDs offer assured returns and are highly liquid, making them suitable for conservative investors. FMPs potentially offer stable returns and are tax-efficient but they come with relatively lower returns and are less liquid.

  2. Is a fixed maturity plan safe? 

    FMPs are considered relatively safe as they invest in debt instruments matching their maturity period, minimising interest rate risk. However, they have a strict lock-in period and are not entirely risk-free.

  3. What happens when FMP matures? 

    Upon maturity of an FMP, you receive the principal amount and profits earned over the period. The returns are similar to the indicative returns mentioned during the purchase.

  4. Who should consider a FMP? 

    If you have a low-risk tolerance and are seeking stable investments with little volatility to match stock market fluctuations, a fixed maturity plan may be the best way to proceed. In short, FMPs are suitable for investors with a low-risk appetite, a fixed investment horizon, and specific financial goals.

  5. How are fixed maturity plans taxed? 

    FMPs are taxed as debt funds. Short-term capital gains (STCG) are taxed as per the income tax slab if held for less than three years. Long-term capital gains (LTCG) are taxed at 20% with indexation benefits if held for more than three years.

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