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Fixed Maturity Plans

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What Are Fixed Maturity Plans?

Fixed maturity plans are like bank fixed deposits since they keep money locked for a predefined period. A Fixed Maturity Plan or FMP is a close-ended mutual fund scheme usually with a tenure between one (1) month and five (5) years. Generally, investors invest in FMPs with tenures of 30, 180, 370, and 395 days.  View More

Fixed maturity plans invest in high-quality debt fixed income instruments. FMP’s primary objective is to lock the current yield and offer steady returns without much volatility. As a result, FMPs are a viable alternative to conventional bank deposits and often deliver higher returns.

Who Should Invest in Fixed Maturity Plans?

Fixed maturity plans are debt funds investing in government securities, corporate bonds, certificates of deposit, call money, commercial papers, and the like. However, unlike standard debt funds, FMPs are close-ended. Although the returns of these funds are never guaranteed, it is relatively easy to predict the maturity value since investors know the interest rate, portfolio, and maturity date when investing.  View More

Hence, you can invest in fixed maturity plans if you belong to any of the investors mentioned above categories:

  • You want to protect yourself from interest rate fluctuations and grow your capital sensibly.
  • You want bank FD-like flexibility to choose your investment tenure. So, if you invest in a 30-day FMP, you can get the principal and interest back exactly on the 31st day.
  • You want a little higher liquidity than bank FDs. FMPs are traded on the stock exchange. However, despite being listed and liquid, FMPs are generally not traded often for a scarcity of buyers.
  • You know the fundamentals of the debt market and how the prices of debt instruments move. The debt (secondary) market generally behaves opposite to the primary market. So, if the equity market goes up, the debt market typically remains subdued.
  • You have surplus cash in your account and earn higher returns than the savings account interest rate.
  • Your investment horizon is short to medium-term.
  • You will not need the money invested before maturity.
  • You want to experience market volatility without taking many risks.
  • You want better after-tax returns from an alternative investment option.

Features of Fixed Maturity Plans

Defined Maturity

Investors can choose a fixed maturity plan based on their financial objectives and investment horizon. Mutual fund houses usually declare the tentative returns of an FMP during the NFO (New Fund Offer) period. Hence, you can get a near-perfect idea of the returns when investing. View More

Close-Ended

You can invest in an FMP only during the NFO period and withdraw it on maturity or after. But, since FMPs are listed on the stock exchange, you can also sell them through the stock exchange. For this, a Demat account will be needed.

Investment Methodology

Fixed maturity plans invest in top-quality debt instruments like certificates of deposit, commercial paper, corporate bonds, non-convertible debentures, government securities, and other money market instruments with fixed maturity.

Interest Rate Volatility

FMPs are relatively less volatile than other capital market investments. Moreover, since a mutual fund holds these instruments only until maturity, you can stay assured about the interest rate.

Taxability of Fixed Maturity Plans

Perhaps the significant benefit of investing in the best fixed maturity plans is that they offer you better tax-adjusted returns than conventional bank deposits. If you opt for a tenure above three years, you can claim indexation benefits to adjust your tax liability against inflation of CPI (Consumer Price Index). View More

When it comes to the dividends distributed by the mutual fund house for your scheme, they will be included in your net annual income and taxed according to the applicable income tax slab. Before the financial year 2021, mutual fund houses paid Dividend Distribution Tax (DDT), and investors were not required to pay any taxes.

If you invest in an FMP with maturity before three years, you will need to pay a Short-Term Capital Gains (STCG) tax. The STCG will be as per your prevailing income tax slab. However, if you invest in a 3-year FD, your profit will be taxed at 20% after indexation.

Risks Involved With Fixed Maturity Plans

Credit Risk

Fixed maturity plans are subject to credit risks arising from rating downgrading. Every debt instrument receives a credit rating from credit rating agencies. If the issuer of the underlying asset defaults on paying the principal and coupon rate (interest) on maturity, their credit rating decreases. If this happens after you invest, your investment amount may not grow in the way you expected.  View More

Liquidity Risk

The liquidity risk of fixed maturity plans may occur in two ways. First, if you plan to sell the FMP in the secondary market through a stock exchange, you may or may not find suitable buyers. Second, when the fund manager plans to sell it on maturity, they may not find reasonable rates and still go ahead with the sale after substantial losses.

Market Risk

Market risk refers to the price volatility due to various macro and microeconomic factors. If the fund’s NAV (Net Asset Value) decreases after your purchase, you will have to digest a loss.

Availability Risk

Fixed maturity plans are not as available as open-ended mutual fund schemes. You can only buy units in these funds when a fund house launches such schemes. So, you may have to wait for a long time to invest in these schemes.

Advantage of Fixed Maturity Plans

  • Safety – FMPs are generally more stable and safe than pure equity instruments. A quick scan of the top-performing FMPs reveals that they have traditionally been less volatile than equity stocks or mutual funds.

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  • High-Quality Debt Instruments – Since the primary goal of an FMP is to protect the investors’ capital, mutual fund houses typically invest in the best debt instruments to provide portfolio stability.
  • Nil Interest Rate Risk – Pure debt instruments behave differently from the capital market. In contrast, FMPs come with a predefined interest rate. So, you can be almost sure of getting the returns mentioned in the fund brochure.
  • Better Tax-Adjusted Returns – You can get better tax-adjusted returns on fixed maturity plans because of indexation benefits.
  • Ease of Investment – Portfolio management platforms facilitate easy investment in fixed maturity plans. You can create a free account, browse the top FMP mutual fund schemes, and invest in a few clicks.
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