Fixed Maturity Plan and Its Importance to Your Investment Portfolio
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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