Investors find mutual fund investments more attractive for better returns and capital appreciation than traditional options like Provident Funds (PFs), National Savings Certificates (NSCs), Fixed Deposits (FDs), and so on.
Fund houses or asset management companies (AMCs) manage mutual funds. They pool your money to invest it across various financial instruments. One such scheme is a fixed maturity plan (FMP) — a close-ended debt fund that gives you a predictable rate of return.
FMP in mutual funds predominantly invests in fixed income instruments whose maturity periods sync with FMP scheme tenure. This article will explore fixed maturity plans to help you make sound mutual fund investment decisions.
A fixed maturity plan meaning implies a fixed-tenure, close-ended mutual fund scheme with a limited investment option. It mainly invests in fixed income instruments, including commercial papers (CPs), certificates of deposit (CODs), government securities, and treasury bills.
The maturity period of FMP funds could range from a few months to a few years. For instance, you have an FMP with a maturity period of 2 years. Then, your AMC would invest in debt securities with a two-year tenure, ensuring the debt instruments’ maturity period does not exceed that of your FMP.
Different fixed-income securities with corresponding maturities make up an FMP portfolio.
A fund manager makes investments in instruments so that they all mature at around the same time based on the FMP’s terms. All plan units are held until they mature on a specific date during the plan’s lifespan. Investors can therefore estimate the plan’s return rate.
As you can see, the FMP funds are designed to reduce the interest rate risk. It safeguards your investments from any interest rate fluctuation during the term of the FMP scheme.
FMP in mutual funds is best suited for those investors who are risk averse but still want a better tax-efficient return than a regular fixed deposit (FD). Investors ready to accept continual net asset value (NAV) fluctuations can opt for a fixed maturity plan.
NAV implies a mutual fund’s scheme unit price based on which mutual funds are purchased or sold. As FMP has limited liquidity with a lock-in period, investors with an urgent need of funds can consider investing their money in an FMP over the NFO maturity period.
Investors can invest only in a fixed maturity plan during a new fund offer (NFO) scheme by an AMC based on subscription requests. It is pertinent to note that post the NFO completion period, you cannot make any new investments in the said FMP scheme.
As per the Securities and Exchange Board of India (SEBI), mutual fund houses need to provide investors with ways for an early redemption from the scheme. Closed-ended schemes like FMPs can be redeemed earlier than their maturity period when they are listed on a stock exchange.
You can thus buy or sell FMP units when they get listed on a recognised stock exchange. Otherwise, investors cannot freely enter or exit an FMP anytime in fixed-period mutual funds.
Here are the key features of the FMP:
FMP funds have a fixed lock-in period during which you cannot withdraw the investment in the said scheme. The primary purpose of having rigid withdrawal guidelines for a fixed maturity plan is to generate optimum returns for the scheme during the lock-in period. You can select the FMP based on your investment goals and liquidity requirements.
Fund managers mainly invest fixed maturity plans in fixed income instruments like CODs, CPs, and good companies, which mature in line with the FMP’s maturity period.
As FMP funds are closed-ended schemes, you can invest only during the initial NFO period like the FMP maturity plan 2021, and redeem the series on the scheme’s maturity. Investors who invest in FMP units via Demat mode can redeem them by selling them on the stock exchange where the FMP scheme units are listed.
An FMP majorly invests in debt instruments, including treasury bills, non-convertible debentures, and related debt securities. Fund managers create debt portfolios to mitigate the risk aspect of the debt securities; stock market fluctuations barely impact such securities. As debt securities are the primary source of FMP investments, FMPs have minimal interest rate risk exposure.
FMP fund managers invest in debt securities of well-known companies to build a sizeable corpus and generate the highest returns on your FMPs. As such, the risk is reduced for FMP funds, making them one of the safest investment options.
Like every other money market instrument, Fixed Maturity Plans also have their fair share of pros and cons:
A fixed maturity plan provides its investors with a steady return.
FMPs are closed-ended maturity plans mainly investing in debt securities, so the FMP funds are not severely impacted by market fluctuations. You keep earning interest on your FMP investment till the maturity period.
During a recessionary period, investors consider bonds less risky, making them more popular, and earning a higher return on bond investments.
As FMP funds primarily invest in fixed income debt instruments of good companies, they are subject to minimal risk compared to the riskier equity mutual funds. Debt instruments are a company’s liabilities, which are repaid first from the company’s yearly revenues.
Its low-risk element also gives higher credit ratings to a fixed maturity plan. It makes them a safe investment option with stable returns for investors with a low-risk appetite.
When it comes to tax on FMPs, they offer superior tax efficiency compared to FDs. If an investor holds an FMP for more than a year, they can benefit from indexation, reducing their tax liability by accounting for inflation.
Compared to equity mutual funds, FMPs generate relatively lower yields. FMP funds yield a fixed percentage of return over the investment period, so you get constant interest in your investment. However, you may lose out on the benefit of higher returns from any positive stock market cyclical movement.
There is no benefit to partial withdrawal in a fixed maturity plan as you have to keep your funds locked in over your FMP term. If you have any urgent fund requirements, you will be unable to redeem your FMP investment, creating liquidity challenges.
Fixed maturity plans are close-ended schemes offering steady returns over a fixed tenure to protect investors against market fluctuations. FMP is suitable for investors who are risk averse and want stable tax efficient returns.
1. Are Fixed Maturity Plans tax-free?
Fixed Maturity Plans are not tax-free.
If FMP is held for less than 12 months, short-term capital gains tax is applicable based on your income tax slab. Likewise, a long-term capital gains indexation benefit is available if you hold an FMP for more than 12 months.
You will be able to earn better returns compared to an FD for the same period.
2. Are FMPs a safe investment option?
FMP funds are considered safe like an FD. However, just like other mutual fund schemes, you should constantly evaluate the various risks in FMP investing.
When held over their fixed tenure, FMPs help minimise the interest rate risk and provide predictable returns, making them a safe investment option.
3. Can I redeem my FMP funds?
As FMP funds are closed-end funds, they have a fixed maturity period or a pre-determined date. FMPs can be redeemed only after the fixed maturity period expires. The only exception is when they get listed on a stock exchange; you can redeem them early.
4. What is FMP full form?
FMP full form is a fixed maturity plan.