What are Fixed Maturity Plans (FMPs): Benefits, Taxation & Factors To Consider
Fixed Maturity Plans (FMPs) are close-ended debt mutual funds with a pre-defined maturity period similar to traditional fixed deposits (FDs). They invest in various debt securities such as corporate bonds, certificates of deposits, government securities, non-convertible debentures, and money market instruments.
How do Fixed Maturity Plans Work?
An FMP portfolio consists of various debt securities with a maturity period. The fund manager invests in a way that all units of the plan mature at the same time. Investors may get the indicated rate of returns; however, that’s not guaranteed.
Investors can purchase units of FMPs between the New Fund Offer (NFO) opening and closing date and can redeem the returns at the time of maturity. The maturity period can range from 1 month to 5 years, during which you cannot withdraw the amount. Those with fund units held in a Demat account can sell them on stock exchanges to exit their investments.
FMP aims to protect investors from market fluctuations by offering steady returns over a fixed period. Their fixed lock-in period minimises interest rate risk and liquidity risk as the investments get liquidated upon maturity. Thus, they are a suitable option for conservative investors due to their low risks.
Benefits of Investing in FMPs
- Predictable Returns: Before investing in a fixed maturity plan, you can know how much return you will likely get at the NFO stage. Therefore, you can choose the right investment as per your financial goals more easily.
- Capital Protection: FMPs carry a lower risk of capital loss than equity funds as they invest in debt instruments. Most of these investments are in AAA or similarly rated credit instruments, which leads to low credit risk.
- Stable Returns: FMPs are not prone to interest rate volatility as investors cannot exit the investment prematurely. This results in more stable returns compared to open-ended funds, which often face volatility due to changing prices of their assets.
- Tax Savings: You can choose a fixed maturity plan with a tenure of over three years to save tax. This is because you can get the benefit of indexation, which reduces your taxable income due to the effects of inflation.
- Low Expense Ratio: Fund managers have low operating expenses of these funds as there is little buying/selling of instruments involved. This results in a low expense ratio.
On the other hand, if you are looking for a debt-oriented fund without any lock-in period to park your surplus cash, you may want to consider liquid funds. Navi Liquid Fund offers a high degree of safety on investments due to the low maturity period of the underlying debt instruments. Visit Navi Mutual Fund to start investing and fulfilling your investment objectives.
Who May Invest in Fixed Maturity Plans?
The following investors may find FMPs a suitable investment option:
- These are ideal for conservative investors who do not want to take a high level of risk.
- Those who want higher returns than bank fixed deposits without taking too much risk.
- Investors who are willing to lock their funds for the scheme’s tenure and do not need intermediate liquidity.
- Investors who want to invest in mutual funds but do not want equity exposure.
Factors to Consider before Investing in Fixed Maturity Plans
Here are some of the important things you will want to consider when purchasing units of this type of mutual fund:
- Risk Tolerance: Risk tolerance refers to how much risk you are willing to take for the possibility of high returns. If you cannot bear high risks, invest in fixed maturity plans.
- Financial Goal: You should choose an investment that aligns with your financial goal. This can include going on a vacation, financing children’s education or buying a house/car. If you need funds in a few years, you should make sure that your investment’s maturity date corresponds to that time.
- Experience of the Fund Manager: The fund manager’s qualifications and expertise are vital aspects to consider for investors as the performance of the scheme will depend on their buy-and-sell decisions. You should also check the performance of funds that they managed in the past and compare them to the benchmark indices.
- Expense Ratio: All mutual funds have charges applicable for management, operations, advertisement and distribution. The expense ratio includes all such expenses involved in running a fund. Fund houses in India can charge a maximum of 2.00% of the total fund assets as an expense ratio for debt-oriented mutual funds.
You will want to look for an FMP that charges a lower expense ratio to get higher net returns.
Also Read
Taxability of Fixed Maturity Plans
The taxation rules for FMPs are the same as any other debt mutual fund. Capital gains from such investments are taxable according to the duration of investment, i.e., the holding period. For a holding period below three years, short-term capital gains (STCG) are taxable, while for a longer period, long-term capital gains (LTCG) tax is applicable.
Short-term capital gains are added to your taxable income, and the taxes are charged according to your income tax slab. You may also have to pay an additional surcharge and cess. Long-term capital gains are taxed at a flat rate of 20% with the benefit of indexation, which reduces your tax liability.
Final Word
Fixed Maturity Plans are debt funds with a fixed maturity period. They are suitable for investors who are looking for an alternative low-risk investment plan with a lock-in period. FMPs offer a wide range of tenures, and you can choose one that suits your investment goal.
FAQs
Ans: Fixed maturity plans are open for subscription only during their NFO (New Fund Offer) period. This is the first time a subscription offer is launched by the fund house to raise capital from the market. Investors can redeem their capital generated along with interests only after the maturity period of the NFO.
Ans: You can invest in these mutual funds through lump-sum investments. This is ideal when you have a considerable sum of money to invest in one go. And, SIP (Systematic Investment Plan). This involves investing a small sum of money at regular intervals.
Ans: The indexation benefit refers to the adjustment of costs of a capital asset due to the effects of inflation as per notification of the government. It is applicable to LTCG earned from debt-oriented funds and allows you to reduce overall taxation.
Ans: The duration of your investment should depend on your financial goals. This should be based on your investment plan. As these funds come with a fixed lock-in period, you may select an appropriate maturity period to get the money in time.
Ans: Diversification is an investment strategy that helps to lower risks by investing across various asset classes and sub-classes. Different asset classes react differently to factors such as interest rates, market conditions and the performance of currencies. This is why diversification is necessary to mitigate portfolio risk.
Want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research? Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
