FIXED DEPOSITSFIXED INCOMEFIXED INCOME MUTUAL FUNDSFIXED MATURITY PLANS (FMP)MUTUAL FUNDS

What Are Fixed Maturity Plans (FMP) ?

What is FMP? Why is it better than Fixed Deposits?

Fixed Maturity Plan or FMP is considered to be a closed-end debt mutual fund. Such kind of mutual funds have their investments only in the instruments the duration of whom is similar to its very own term, i.e. this kind of deposit aligns its terms in tandem with all its underlying assets. Fixed Maturity Plans are the closed-end debt funds which have a fixed maturity period. Unlike all kinds of open-ended funds, the FMPs are not made available for the subscription on a continuous or simultaneous basis.

The fund house shows up with a New Fund Offer (NFO) which prevails for a particular period of time. Such NFO shall have an opening date as well as a closing date. Being an investor, you may invest in the NFOs only during this particular time-period. If the closing date of the new fund offer expires, the offers stops to even exist.

Investment streams of Fixed Maturity Plan:

Fixed Maturity Plans are usually prone to the investments in the debt instruments such as certificate of deposits, corporate bonds, money market instruments, commercial papers as well as bank fixed deposits. Based upon the duration of the scheme, the fund manager tends to allocate your money in the instruments having similar maturity. For instance, if the fixed maturity plan extends to 5 years of duration, the fund manager would make an investment in a corporate bond that has a maturity of total 5 years.

Quite contrary to the debt funds, the fund manager of the fixed maturity plan follows a strategy of buy and hold. There doesn’t exist any frequent business of buying and selling of debt securities as that happens in other debt funds. This concept of FMP helps to keep the ratio of expenses at a comparative lower level in comparison with other debt funds.

Who should invest in Fixed Maturity Plans?

The value of your fixed maturity plan is reflected by the fund NAV. You shall get to know the net asset value of the fixed maturity plan on a daily basis. The point of understanding here is that net asset value of the funds keeps on fluctuating every other day. Thus, it is affected by the interest rate movements in the economy which eventually makes the Fixed Maturity Plans riskier than the Fixed Deposits.

Thus, FMPs serve as an ideal choice for all those investors who look forward to getting their returns higher than any regular FD but who are okay with the frequent fluctuations in the net asset values. If comparison is to be made with the equity funds, FMPs are considered to be at a lower risk lower return investments. Because of such restricted liquidity of these funds, it is generally recommended to the investors who wouldn’t need these funds for the period of the scheme.

Things to know before investing in the Fixed Maturity Plans:

While the fixed deposits assure you the returns, fixed maturity plans indicate a probable return. You are hence required to understand the difference and expect a minute change as to the returns so indicated during the beginning of the buying period/phase.

Fixed Maturity Plans are also considered to be a useful option for all the investors in the high-income tax brackets. All these investors generally end up paying a lump sum amount as the tax on the interest earned on to the fixed deposits held by them. Fixed maturity plans fetch them with the choice of earning smaller returns at a tax rate much lower in nature. Thus, if you are planning to invest in the fixed maturity plans, you must always keep in mind that these are not the fixed deposits but the mutual funds schemes.

Look for the investment objectives of the scheme and figure out the indicated yield and investment strategy. Once you are in tandem with everything, you should be investing an amount which you can leave invested for a period of three years and later reap off tax-efficient returns.

Benefits of Fixed Maturity Plans:

Following are the major benefits of fixed maturity plans:

  1. Minimal risk:

Debt funds are usually exposed to the risks of three kinds, namely interest rate risk, liquidity risk and credit risk. FMPs on the other hand are designed so effectively that they minimize as well as eliminate the risks in some cases. Thus, this effectively means that the investors are at the option to protect themselves from any sort of capital loss on maturity.

  1. Low expenses:

Fixed maturity plans due to their basic nature of holding the instrument till maturity are considered to be superior to the fixed deposits for a simple fact that they minimize your expenses. Unlike a bond fund, there doesn’t exist any redemption pressure nor regular churning of the portfolio. This eventually cuts down the costs that are otherwise incurred in buying these instruments. Apart from this, it also cuts down the costs of the review of the portfolio on a regular basis by the fund manager.

  1. Liquidity:

Although fixed maturity plans are the best choice if they are held till the period of maturity, the investors are still at the option to exit them at any point of time since the fixed maturity plans are traded.

 

Fixed Maturity Plans or Fixed Deposits – which one is better?

Being a debt instrument, both fixed maturity plans as well as fixed deposits come with a lot of similarities. Both of them require you to stay invested for a fixed time period. Both of them are made available in different maturities so as to suit your comfort and convenience. However, fixed maturity plans are considered to be a stark contrast to the fixed deposits from the perspective of returns. Unlike the concept of guaranteed returns reflecting upon the certificate of fixed deposits, fixed maturity plans offer a more indicative yield. This clearly means that the returns given by fixed maturity plans are not assured however, indicative in nature, there is still an option of the actual returns being higher or lower than the returns that are indicated during the NFO.

The point of difference in between the two can be understood as below:

Parameter Fixed Maturity Plans Fixed Deposits
Returns The returns are more indicative in nature. The returns are more assured in nature.
Tax 1. Dividend Option – DDT tax
2. Growth Option – Tax on capital gains
Interest earned is added to your income, and the income is taxed accordingly
Liquidity Restricted liquidity Ease of premature redemption, higher liquidity

 

In the present market scenario, the yield curve is more elevated, along with the short end of the yield curve which eventually makes fixed maturity plans a better option to lock the availability of the surplus funds. Fixed maturity plans perfectly cater to the growing needs of both the individuals as well as the corporate houses. Fixed maturity plans come with a twin advantage of higher returns ad tax efficiency respectively.

 

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Chalo Niveshak

We are financial Advisor based at Ahmedabad. having a vaste experience of more than 10 years in financial sector. More than 500 families are happily enjoying services provided by us in their financial planning journey. We are also associated with more than 10000 financial advisors accross India and discussing about various needs and problems of investors. so we know how to deal with various objectives of various goals of our investors better than others.

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