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Fixed Maturity Plans – Definition, Features and Should You Invest in Them

Highlights

  • Fixed Maturity Plans (FMPs) are close-ended debt funds that invest in debt securities for a fixed tenure
  • The yield on these funds have dropped, so shall you invest here - This post will help you decide

Debt funds invest in debt securities such as corporate bonds, money market instruments, commercial paper, certificate of deposit, treasury bills and government securities. Different types of debt funds invest for varying maturities or duration of these securities. So, there could be a debt fund investing in securities maturing in a day, month, year, three years and more.

Categories of debt funds are classified based on their maturity profile and the type of securities they buy in the portfolio. FMPs (fixed maturity plans) are a type of debt fund, let us understand more about these funds.

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What is FMP (FIXED MATURITY PLAN)?

Fixed Maturity Plans (FMPs) are close-ended debt funds that invest in debt securities for a fixed tenure. This tenure could be anywhere between 1month to 5 years and even more.

FMPs are not open-ended i.e. you cannot buy and sell at your will; they are different from all other debt funds in this aspect. FMPs are launched by mutual fund companies from time to time as an NFO (new fund offer), somewhat similar to an IPO in equity and you can invest only during the NFO period.

The objective of FMPs is to deliver fixed returns by buying and holding debt securities for a fixed tenure. Let us understand with an example. A mutual fund house launches a 2-year FMP with a yield/interest rate of 8%. The launch dates are 1st to 10th July 2020. You can invest in this FMP only between these dates. On 10th July 2020, this FMP will close. At the end of two years i.e. 10th July 2022, you will get an 8% annualized return from this investment.

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These funds do not have interest rate risk since the interest rate is blocked and fixed. FMPs are usually launched and do well in a rising interest rate scenario since you get a higher interest rate/ return on your investment. Among all debt funds, FMPs are the closest when compared to a bank FD (fixed deposit).

Like all other funds, these funds have their own features. Let us understand them.

Features of FMPs

Returns – You can expect better returns from these funds when compared to liquid funds, they could be higher by 2-3% depending on the debt securities bought, especially in a rising interest rate scenario.

Volatility – Since the rate of interest is fixed in the case of FMPs, these funds are not volatile and provide steady NAVs.

Risk – FMPs do not have interest rate risk since yield or interest rate on each debt security is blocked. So, if an FMP promises a yield/return of 8% annualized in the next 2 years but interest rates fall to 6%, this FMP will still deliver an 8% annualized return. However, these do carry credit risk since one or more companies whose debt security has been bought in the portfolio might default on payment. You should check the portfolio quality before investing.

Liquidity – FMPs are not liquid, you cannot withdraw before the completion of full tenure. So, if you invest in an FMP of 3-year tenure, you can withdraw only after 3 years and not in between.

Taxation – If you invest in an FMP with a tenure of 3 years and more, these are tax-friendly since you can avail indexation benefits. Your investment over 3 years will be applicable for a short term capital gain tax.

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Should You Invest in FMPs?

FMPs are suitable for people who are looking for a fixed return without any interest rate risk. If you want your debt investment to be risk-free and are comfortable in holding on for a fixed tenure, FMPs are ideal for you. Thus, FMPs are very similar to fixed deposits, albeit with a slightly higher return based on the portfolio quality.

If you are looking for extra returns over a fixed deposit or a liquid fund with low risk, you can opt for an FMP. However, you should invest an amount that you will not need during that tenure since you cannot withdraw prematurely from FMPs. In a fixed deposit, you have an option to withdraw by paying a charge/fee.

You cannot invest in an FMP whenever you wish to, you will have to check if any mutual fund has got an FMP NFO which is running currently. In open-ended debt funds, you can invest or withdraw anytime.

In the current scenario, the yield on FMPs is very low since interest rates have come down sharply, you can check that by looking at the interest offered by your bank on savings accounts or fixed deposits which have reduced sharply. Therefore, we recommend investing in a liquid fund or overnight fund if you are looking for safe options in debt funds, these also give you complete liquidity.

If you are ready to take slightly higher risk and have a time horizon of 6 months to 1 year, it is advisable to invest in low duration or short term funds. Please analyze the portfolio quality of these funds before investing.

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We have earlier written about the best overnight, liquid, ultra-short and short term duration debt funds. You can read about them from the links given below.

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