What are Fixed Maturity Plans (FMPs)
- FMPs are close-ended debt funds with a specific tenure which means that an investor can invest only during the New Fund Offer (NFO) period.
- The period may range from one month to five years, but generally it is for around 3 years.
Where do Fixed Maturity Plans (FMPs) invest?
- FMPs invest in fixed income securities like certificates of deposits (CDs), commercial papers (CPs), money market instruments and highly-rated securities (like ‘AAA’-rated corporate bonds).
- The investment portfolio consists of fixed-income instruments with matching maturities which means that the fund manager invests in a way that all the instruments mature around the same time.
For example, if the FMP is for four years, the fund manager will invest in instruments with a maturity of four years or less. This helps the investor get an indicative rate of return while protecting him against interest rate volatility.
How do Fixed Maturity Plans (FMPs) work?
- FMPs are listed on the stock exchanges.
- Investors can invest only at the time of a new fund offering (NFO).
- An investor cannot withdraw before maturity, but can sell them on the stock exchange.
Why should you invest in Fixed Maturity Plans (FMPs)?
Protection against volatile interest rates: Since FMPs invest in debt instruments, there are lower chances of fluctuations as compared to equity funds. Besides, since the securities are held till maturity, FMPs do not get affected by interest rate volatility.
Lower expense ratio for investors as these instruments are held till maturity which leads to cost saving with respect to buying and selling of instruments.
How are Fixed Maturity Plans better than Fixed Deposits (FDs)?
- FMPs offer better post-tax returns than Fixed Deposits (FDs) due to indexation benefits.
- FMPs with maturity of over three years enjoy long-term capital gains tax benefits. Indexation helps to lower capital gains and thus lower the tax.
|Fixed Deposits||Fixed Maturity Plans|
|Returns||Fixed; mostly in the range of 7-7.5%||Indicative; mostly higher than FDs|
|Tax Implications||Interest income added to income and taxed as per income slab||FMP-Dividend: Dividend Distribution Tax is levied
FMP-Growth : Tax on capital gains depending on tenure
Who should invest in Fixed Maturity Plans (FMPs)?
- Investors looking for steady returns over a fixed period.
- Investors looking for tax-effective regular income as the FMP-Dividend investors are entitled to dividend income.