Fixed Maturity Plans (FMPs): Day 14
Fixed Maturity Plans (FMPs) are a unique type of mutual fund designed to offer predictable returns with minimal risk. As a close-ended debt-oriented investment vehicle, FMPs have gained popularity among Indian investors for their tax efficiency and stable performance.
In this blog, we’ll dive into the details of FMPs, exploring their features, benefits, risks, and why they may be a smart addition to your investment portfolio.
What Are Fixed Maturity Plans (FMPs)?
FMPs are close-ended mutual fund schemes that invest in fixed-income securities like corporate bonds, government securities, commercial papers, and certificates of deposit. These funds have a fixed tenure, typically ranging from one month to five years, and are designed to mature on a predetermined date.
Unlike open-ended funds, FMPs can only be subscribed to during the New Fund Offer (NFO) period and cannot be redeemed before maturity, except through stock exchanges where they are listed.
Key Features of Fixed Maturity Plans
Close-Ended Nature
Investors can only invest during the NFO period.
Redemption is allowed only at maturity.
Defined Investment Tenure
The duration of an FMP aligns with the maturity of its underlying securities.
Focus on Debt Instruments
FMPs primarily invest in fixed-income securities with predetermined maturity dates.
Predictable Returns
Returns are not guaranteed but can be estimated based on the yields of underlying securities.
Low Risk
By holding securities until maturity, FMPs minimize interest rate risks.
Tax Efficiency
Indexation benefits make them a tax-efficient option for investors in higher tax brackets.
How Do FMPs Work?
Fund Allocation
When you invest in an FMP during its NFO, the fund manager allocates the pooled funds to fixed-income instruments with maturities aligned to the fund’s tenure.
Hold-to-Maturity Strategy
The underlying securities are held until maturity, ensuring stability in returns.
Returns Realization
At the end of the FMP’s tenure, the proceeds are distributed to investors based on the performance of the underlying securities.
Listing on Stock Exchanges
FMPs are listed on stock exchanges, allowing early exit by selling units in the secondary market.
Benefits of Investing in Fixed Maturity Plans
Capital Preservation
FMPs aim to preserve capital by investing in low-risk fixed-income instruments.
Predictable Returns
The hold-to-maturity approach reduces volatility and ensures predictable returns.
Tax Efficiency
FMPs held for more than three years qualify for long-term capital gains tax with indexation benefits, significantly reducing tax liability.
Low Expense Ratio
FMPs typically have lower expense ratios compared to other debt funds.
Diversification
Investing in a mix of debt instruments diversifies risk.
Inflation Beating
FMPs offer better post-tax returns compared to traditional fixed deposits (FDs) for investors in higher tax brackets.
Risks Associated with Fixed Maturity Plans
Credit Risk
There is a possibility of default by the issuers of the underlying securities.
Liquidity Risk
Since FMPs are close-ended, you cannot redeem units before maturity unless sold on stock exchanges, where liquidity may be low.
Interest Rate Risk
While FMPs minimize interest rate risk, returns can still be affected if market conditions change significantly.
Market Fluctuations
The value of securities may fluctuate due to macroeconomic factors, though this is limited in FMPs.
FMPs vs. Fixed Deposits (FDs)
|
Feature |
FMPs |
Fixed Deposits |
|
Investment Tenure |
Fixed, aligned with the scheme’s maturity |
Flexible, chosen by the investor |
|
Returns |
Market-linked, predictable |
Fixed |
|
Tax Treatment |
Long-term gains with indexation benefits |
Taxed as per income tax slab |
|
Liquidity |
Low, tradable on stock exchanges |
High, with premature withdrawal options |
|
Risk |
Low to moderate |
Minimal |
Who Should Invest in Fixed Maturity Plans?
Risk-Averse Investors
Those seeking stable and predictable returns with minimal risk.
Tax-Conscious Investors
Individuals in higher tax brackets looking for tax-efficient investment options.
Investors with Fixed Goals
Ideal for those with financial goals aligned to the FMP’s tenure.
Alternative to FDs
Investors seeking better post-tax returns than fixed deposits.
How to Choose the Right FMP?
Check the Fund’s Portfolio
Look for high-credit-quality instruments in the portfolio to minimize credit risk.
Align with Financial Goals
Match the FMP’s maturity period with your investment horizon.
Assess Fund Manager Expertise
Choose funds managed by experienced professionals with a proven track record.
Compare Expense Ratios
Lower expense ratios ensure higher net returns.
Review Historical Performance
Although past performance doesn’t guarantee future returns, it provides insights into the fund’s consistency.
Taxation of Fixed Maturity Plans
Short-Term Capital Gains (STCG)
FMPs held for less than three years are taxed as per the investor’s income tax slab.
Long-Term Capital Gains (LTCG)
FMPs held for more than three years attract LTCG tax at 20% with indexation benefits, significantly reducing the tax burden.
Dividend Income
Dividends are taxed as per the investor’s income tax slab.
Regulations for FMPs in India
FMPs are regulated by the Securities and Exchange Board of India (SEBI), ensuring transparency and investor protection. Some key regulations include:
Mandatory disclosure of portfolio composition.
Limitations on exposure to low-credit-rated securities.
Strict adherence to maturity alignment rules.
Fixed Maturity Plans (FMPs) offer a compelling investment opportunity for those seeking predictable returns, tax efficiency, and minimal risk. While they may lack liquidity compared to other mutual funds, their hold-to-maturity strategy provides a level of stability often preferred by risk-averse investors.
Before investing, it’s crucial to assess your financial goals, risk appetite, and investment horizon. With careful planning and the right choice of FMPs, you can achieve steady returns and tax savings, making them an excellent addition to a diversified investment portfolio.
DISCLAIMER :
MUTUAL FUNDS ARE SUBJECT TO MARKET RISKS READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
