Fixed Maturity Plan and Its Importance to Your Investment Portfolio
Last Updated : March 17, 2017, 12:51 p.m.
Fixed Maturity Plans (FMPs) refer to close-ended debt funds that invest in debt instruments such as certificates of deposits (Cds), corporate debt and commercial papers (CPs). The low-cost investment vehicle offer features including a pre-specified maturity date, quality debt instrument, lock-in period till the maturity date, risk adjusted returns along with indexation benefits on assets held for a term of 1 year-3 years.
Why Fixed Maturity Plans ?
Volatility Management – As FMPs purchase securities with a fixed maturity date, you will be immune from the interest rate risk upon holding the instrument till the maturity.
Tax Efficiency – With FMP, you can get the advantage of indexation that adjusts the purchase price of FMPs for inflation so that you are taxed on actual returns (Maturity Value-Indexed Cost).
Diversification- FMP investment means purchasing various securities such as fixed deposits, recurring deposits. Dispersing the money across such securities cut down the risk factor.
Who can invest in FMPs?
- FMPs are ideally suited for risk averse investors who want to churn out fixed income from the market
- Investors whose area of investment comes at par with the tenure of FMP
- Investors seeking enhanced return after tax by taking indexation benefit
- Investors seeking less volatility in their returns
Things to keep in mind before choosing FMP
- Keep an eye on the appropriate tenure of the FMP along with their liquidity needs
- Know tax implications with a firm focus on indexation benefits
- Check the reputation of the fund house where you are about to invest
- Underlying investments must be made in quality debt instruments