Fixed maturity plans (FMPs) are a form of debt investment offered by mutual funds. They are tax-efficient and normally offer favourable returns. FMPs are closed ended debt schemes with a predetermined fixed maturity date before which investors cannot withdraw their investments. FMPs are exchange-listed, so investors can sell their units in the exchange and the mutual fund does not provide redemption facility before the maturity date.
Unlike FDs, FMPs do not offer a guaranteed rate of return. Depending upon the tenure of FMP, the fund manager invests in a combination of debt instruments of similar maturity. If the FMP is for a period of one year, then the investments are made in instruments of up to one year maturity so that the investments mature on or before the maturity date of the FMP. By doing this, the fund manager attempts to protect the yield of the portfolio and the investor can reasonably assess the likely income from the FMP at maturity, based on the monthly disclosures of investment by the scheme.
As FMPs are passively managed funds, the portfolio turnover will be low resulting in lower transaction costs which enhances the returns for the investor. FMPs may have certain restrictions imposed in their portfolio based on offer terms. It might only invest in securities with an AAA credit rating or debentures etc.
The return offered by an FMP is entirely determined by the yields on the securities it has invested in. These yields reflect inter-alia in the credit risk of the borrowers - the riskier a borrower, the higher the yield of the borrowers offer their debt. Investment in any debt contains an inherent risk of the borrower delaying or defaulting payment of interest or redeeming the debt on the due date. This risk is known as credit risk.
They offer no guaranteed return, unlike fixed deposits, and have limited liquidity options. They come with different maturities like three months, six months, one and two years etc. FMPs invest in instruments of matching maturity and this gives investors a rough idea about the likely returns. Since the portfolio is locked, investors are also shielded against interestrate risks.
Also, FMPs with a maturity of over one year have a tax advantage over fixed deposits. Investors in FMPs have an option to pay tax on long-term capital gains at 10 percent without applying indexation or 20 percent after applying indexation to the cost of acquisition.
Interest from FDs is taxed according to the tax bracket applicable to the person.
Fund houses also list FMP on stock exchanges so that investors can exit if they need money urgently. However, this does not guarantee enough liquidity and attractive price.
These schemes tend to build a portfolio consisting of securities that matures on or before a particular date. NAVs of FMPs may rise or fall during their tenure, but if one stays invested till maturity, one is likely to obtain the indicated return. The key to eliminate the interest rate risk and realise reasonable returns from serial plans is to stay invested in these schemes till maturity.
Fixed maturity plans are fixed tenure, debt-based schemes, which terminate on a pre-determined date. They are designated by month and year and mature or redeem only after a specific period. When these plans are launched, the date on which the plan comes to an end is also mentioned.
These plans match the duration of the instruments in the scheme's portfolio with the investor's approximate holding period. Since investments are held until maturity, the price risk is eliminated.
