Fixed Maturity Plans or FMPs as they are more popularly referred as are a common form of Investment option offered by Mutual Funds. FMPs are tax efficient debt investment instrument that mostly offer favorable returns.
They are generally considered equivalent to Bank FDs as they too have a locking period or are closed ended and also have a fixed maturity date. But, where as Bank FDs have a fixed rate of return, returns from FMPs are only “expected” that is the returns from FMPs are not guaranteed.
FMPs are closed-ended debt mutual fund schemes. Every FMP has a fixed maturity date before which the investors cannot withdraw their invested sum. Also all FMPs are exchange-listed but the mutual fund does not give redemption of FMPs before the maturity date. FMPs come with a fixed tenure which may range from anywhere between a month to few years.
As already highlighted above, one of the key elements of FMPs is that they are tax-efficient. They are subjected to capital gains tax or dividend distribution tax. FMPs offer tax benefits through the lucrative concept of indexation particularly when the period of FMP is over a year. So, as an example if an investor takes a FMP of tenure more than a year, opts for gains as capital appreciation will attract a tax at the rate of 10% or 20% ( depending whether indexation is applicable or not) only, whereas a Bank FD of similar tenure would attract tax applicable at the rate of 30%.
As a matter of fact FMPs are passively managed funds which generally have low transaction costs and produce higher returns for the investor. As FMPs rate of return though higher than Bank FDs is not pre-determined or guaranteed, they carry certain risks of investment with them too. FMPs are mainly subjected to two types of risks that is Liquidity Risk and Credit Risk.
Liquidity Risk arises due to the fact that FMPs invest in securities which are held until the FMP matures. If a FMP is sold at secondary markets for debt securities at bearish conditions, this can result into low returns forming Liquidity Risk. Also the returns generated by FMPs are directly depended on the yields gained by holding a particular set of securities. At times it may happen that the borrower of the securities in which the investor puts the money may delay or default their obligation of paying the interest on the date of maturity. This risk is termed as Credit Risk.
On the whole Fixed Maturity Plans can turn out to be a favorable proposition for investment if the investor is willing to shoulder some level of risk and willing to stay invested for a definite period of time without the facility to withdraw their sum in-between the invested period. The yields are favorable and normally higher than Bank FDs. FMPs are tax-efficient too. So if you are “ok” with no guaranteed returns and limited liquidity options you can surely go for investing your money in Fixed Maturity Plans.