Fixed Maturity Plans (FMPs) are close-ended mutual fund fixed income schemes. Investors can subscribe to this scheme only during the new fund offer period (NFO period). The tenure of the scheme is fixed. Investors cannot redeem units of Fixed Maturity Plans during the tenure of the scheme. Upon maturity of the scheme, the maturity amount will get credited to your bank account.
Post the change in the taxation of debt mutual funds announced in the 2014 Budget, Fixed Maturity Plans (FMPs) now have a minimum tenure of 3 years to avoid short term capital gains tax. Long term capital gains (investments held for more than 3 years) in debt funds (FMPs are debt funds) are taxed at 20% after allowing for indexation benefits. Indexation benefits reduce the tax obligation of investors and the effective tax rate is much lower.
Fixed Maturity Plans usually invest in a variety of fixed income securities like commercial papers, certificates of deposits, and corporate bonds. The fund managers usually buy and hold the securities in the FMP portfolio till maturity and accrue the interest earned paid by the securities. Since the securities are held to maturity, interest rate risk is very low. The fund manager(s) ensures that the maturities of the securities match the tenure of the scheme.
For example, if the tenure of an FMP is 1100 days, then the fund manager will invest in fixed income securities which will mature in 3 years and hold them to maturity. This is done to avoid reinvestment risk. The investment strategy of Fixed Maturity Plans makes these mutual fund schemes attractive to investors who are looking for stable returns.
Who should invest in Fixed Maturity Plans (FMP)?
- FMPs are suitable for conservative investors (investors with a low-risk tolerance, looking for stable returns
- Investors who have an investment horizon of three years or more and do not need liquidity during the tenure of the investment
- Unlike Fixed Deposits, mutual funds do not give assured returns. However, past track record suggests that fixed maturity plans usually give better returns than FDs on a pre-tax basis.
- Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes. FD interest is taxed as per the income tax slab rate of the investor. As discussed earlier, FMP returns are taxed at 20% after allowing for indexation benefits. This makes FMP returns more attractive than FD interest on a post-tax basis.
Risk and Returns
If you understand the risk-return characteristics of FMPs, you will realize that FMPs can give better returns than FDs, even after factoring in the risk-free nature of FDs. Even though FMPs are subject to market risks, the risk is quite low. If you want to reduce your risk even further, you can select FMPs that invest only in the highest quality (e.g. AAA, AA) debt papers.
Information about the investment strategy and the type of securities that the FMP will invest in is provided in the scheme information document of the FMP. Investors should read the scheme information document carefully before investing.
People Often Ask
- Which is better FD or FMP?
FMP is better than FD for investors who have a low-risk tolerance and want to go for the safest option. - What is the return on FMP?
FMPs offer indicative returns unlike FDs which offer fixed returns. - Are FMP safe?
Yes, FMPs are safe but FMPs are not free from credit risk. - Are fixed maturity plans good?
Returns are not guaranteed in FMPs, Fixed Maturity Plans provide investors with the benefit of locked-in returns from instruments held till maturity and high-quality investments minimize the credit risk for investors. - Is 5-year FD tax free?
Interest accrued under the 5th year of FD is exempted from tax. However, in the cumulative FD, the interest earned and re-invested is not eligible for tax benefit under section 80C.
Conclusion
Fixed Maturity Plans in mutual funds are suitable for conservative investors who don’t want to take huge risks. It is always wiser to invest a portion of your money in FMP, that you can easily get in the future.