What are Fixed Maturity Plans (FMPs)?

Fixed Maturity Plans (FMPs) are closed-end funds having a fixed maturity period. Unlike other open-ended debt funds, FMPs are not available for subscription continuously. The fund house comes up with a New Fund Offer (NFO) which will have an opening date and a closing date. You can invest in an NFO only when it is available for subscription. After the closing date, the offer to invest ceases to exist.

FMP – Investment Streams

FMPs usually invest in debt instruments such as certificates of deposit (CDs), money market instruments, corporate bonds, commercial papers (CPs), and bank fixed deposits. The fund manager invests in instruments having similar the desired maturity period.

For example, if FMP is for five years, then the fund manager invests in a corporate bond having a maturity of five years.

How is FMP different from other debt funds?

Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy. There is no frequent buying and selling of debt securities like other debt funds. This helps to keep the expense ratio of FMPs at lower level vis-a-vis other debt funds.

What are the benefits of investing in FMP?

Minimal Interest Rate risk-FMPs are least exposed to interest rate risk because the fund manager will normally hold the instruments till their maturity. Also, FMPs generally invest in securities with higher credit quality so that credit and liquidity risks are minimized.

Low cost-As the investments are made in line with the maturity of the fund, there is no buying or selling securities in the scheme. This reduces the costs of the scheme.

Low Tax - Investments made in an FMP above a certain period allow an investor to take advantage of indexation benefit which can result in lower tax on their gains to the extent of tax saved on the investment. As per current regulations, long term capital gains from debt mutual funds, such as FMPs, enjoy indexation benefit which means adjusting the cost of investment by inputting the impact of inflation on the amount invested for the holding period. Thus, the actual cost of investment will increase equivalent to the indexation factor thereby reducing the capital gains while computing tax. In case of FMPs, an investment held for a period of more than 36 months qualifies as a long-term investment. So, for any gains arising from this investment, the tax liability is 20% (plus surcharge) with indexation. Further, higher the tax bracket of the investor, higher is the benefit to invest

Things to consider before investing in FMPs

Returns trend

While FDs assure returns, FMPs indicate a probable return. You need to understand the difference and expect a small change in the returns indicated during the initial buying phase.

Tax implications

FMPs can also be useful for investors in the high-income tax brackets. These investors usually end up paying massive amounts as the tax on the interest earned on the FDs held by them. FMPs give them the option of making similar returns at a much lower tax rate (due to indexation benefit in long-term capital gains).

Investment objective

Look for the investment objective of the scheme, indicated yield and investment strategy. Once you are in sync with these, then invest an amount that you can leave invested for three years and reap tax-efficient returns

FMPs Vs FDs

Being a debt instrument, FMPs and FDs are similar in many ways. Both require you to stay invested for a fixed duration. Both of them are available in varying maturities to suit your convenience. However, FMPs are a contrast to FDs when you look at it from a returns perspective.

Unlike the guaranteed returns that reflect on the FD certificate, FMPs offer an indicative yield – the returns provided by FMPs are not assured but indicative. It means that there is a chance of the actual returns being higher or lower than the returns indicated during the NFO launch. Please see the table below to understand this better: 

How Indexation benefits a FMP vs. Fixed Deposit

MUTUAL FUND SIP RETURNS.

CATEGORY AVERAGE RETURNS

                                                                                                              -CA JAYESH GANDHI

 Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.