Fixed maturity plans (FMPs) are close-ended debt mutual funds in which come with a maturity period that is reached at the time upon completion of a predetermined time period. Investors can invest in an FMP only when there is a new fund offer (NFO) rollout. These funds do not accept any investment post completion of the NFO period. Fixed maturity plan investments allow redemption only after the scheme reaches maturity, and investors cannot make any premature redemption of units during the term.
An FMP is often used as an alternative to fixed deposits by investors who are comfortable investing in debt products and aiming to invest in tax efficient funds. Let’s explore more about Fixed maturity plans and learn about their features, benefits, limitations, etc.
What are the main features of Fixed Maturity Plans?
Listed here are the key features of Fixed Maturity Plans:
- Fixed Tenure/Maturity Period: FMPs come with a fixed maturity period and once an investor invests through NFO, his/her funds are locked in till maturity. Most FMPs have a maturity period of over 3 years and are calculated from the date of unit allocation. This allows investors to obtain indexation benefits through FMP investments.
- Close-ended funds: This means investment in the scheme is allowed only during the NFO period. Once the NFO period is completed, no additional investment is accepted by the fund and investors can redeem the scheme units only post the maturity of the fund.
- Limited interest rate sensitivity: A large portion of investments made by FMPs are held till maturity. Thus, FMPs tend to have low interest rate sensitivity. FMP investments mainly allow investors to lock-in interest rates for a longer duration, and this helps investors whenever interest rates fall.
- Comparatively low credit risk: FMPs primarily invest in high-quality debt and money market instruments that have potentially low credit risk levels.
- Indexation benefits on returns: Many FMPs come with a maturity period of 3 years or more. Thus, long-term capital gains tax along with indexation benefits normally apply to the capital gains generated from these investments. Indexation comes with the benefit of inflation factoring and reduces the overall tax liability of investors.
Major benefits of Fixed Maturity Plans
FMPs can offer many benefits to investors, some of these are:
- Tax-Efficient post 3-years
The indexation benefit offered by FMPs makes these investments highly tax-efficient for investors. This, however, is true only for investors who stay invested for more than 3-years.
FMP investments are locked in for a pre-decided duration. Thus, the investment goes through various market movements. This allows the fund performance to stabilise over time. FMPs are often minimally affected by market movements.
- Limited Risk
Although FMPs are not risk-free, the risk level is low, especially as compared to investment types like equity mutual funds. Since investors have to remain invested until maturity, interest volatility is often negligible.
Drawbacks of Fixed Maturity Plans
FMPs have certain limitations, and investors must know these before finalising their investment. Listed here are some of them:
- Limited Liquidity: Since FMPs do not allow redemption of scheme units before maturity of the scheme, these offer low liquidity to investors. Investors who wish to redeem their FMP investments before maturity can do so via the stock exchange on which the scheme is listed. It is mandatory for investors to have a Demat account in case they wish to make redemptions through stock exchanges.
- Locked-In Rates: Although locked-in rates can benefit during a drop in interest rates, it can turn into a problem when interest rates rise. As interest rates move upwards and rates on the fund are locked in, it can result in missed opportunities to gain higher returns combined with potentially lower risk levels.
- No Guaranteed Returns: Fixed Maturity Plans offer the benefit of locked-in returns until maturity and high-quality investments made by the funds can help in minimizing the credit risk. However, the potentially lower risk does not mean that there is no risk for investors since FMP returns are still market driven. Thus, no FMP fund can guarantee returns unlike many fixed return instruments like fixed deposits.
Who should invest in Fixed Maturity Plans?
FMPs are an ideal investment option for investors who do not have a high-risk appetite. These are ideal for those looking to earn higher returns as compared to bank deposits. However, investors must note that similar to any other form of investment, FMPs too have some risks.
The net asset value (NAV) of FMPs can change with interest rate fluctuations and also be influenced by other economic factors. FMP is a good investment option for those who are willing to lock-in their funds until the fund matures. Thus, investors with a longer time horizon can opt for these funds.
Examples of Fixed Maturity Funds
Some of the FMPs in India are as mentioned below:
- SBI Fixed Maturity Plan (FMP) – Series 5 (92 Days) Direct – Dividend
- SBI Fixed Maturity Plan (FMP) – Series 8 (1178 Days) Regular – Growth
- Tata Fixed Maturity Plan Series 56 Scheme E Regular – Growth
- Tata Fixed Maturity Plan Series 46 Scheme K Regular-Dividend
- Tata Fixed Maturity Plan Series 31 Scheme C -Growth
- Tata Fixed Maturity Plan Series 49 Scheme B Plan A-Growth
- SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan
- SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan
With FMP investments, investors can perform somewhat accurate financial planning since they can easily determine the total earnings from these beforehand. These funds mostly have fixed expected returns, since interest on underlying securities is often declared during issuance. An investor looking to mitigate the overall risk factor in an investment portfolio can consider FMP investment.
Frequently Asked Questions
Do fixed maturity plans invite tax?
Fixed maturity plans mostly have a maturity period of 3 years. Therefore, these plans fall under the taxation bucket of long-term Debt funds. Long Term Capital Gains of 20% combined with indexation is applicable to these.
Who should invest in a Fixed Maturity Plan?
Investors who want higher returns as compared to FDs and RDs and have low-to-medium risk appetite can invest in these plans. Also, investors must be comfortable to lock-in their funds for a minimum of 3 years.
Are FMP investments better than bank FDs?
FMPs sometimes deliver higher returns than FDs. However, FMPs also come with certain risks that are higher than in FDs. FMPs also have a fixed maturity period, and FDs provide investors with the option of premature withdrawal. Thus, investors have to carefully measure the pros and cons of each before selecting one option.
Where do FMPs invest?
FMPs invest mostly in fixed-income securities including Debt funds, Certificates of Deposit, Money Market Instruments, Corporate Bonds, Commercial Papers, and Bank FDs, etc. The investment options are selected after matching the investment instrument’s maturity period with that of the FMP.
Do FMPs offer liquidity?
Fixed Maturity Plans are not liquid since these come with a fixed maturity period of varying tenures.