There are many different types of investors, with different risk appetites and investment goals. Some investors are comfortable with taking on a lot of risk in the hope of making big returns, while others prefer to play it safe and protect their capital. For investors who fall into the latter category, instruments like fixed deposits have always been the go-to investments. Now, there are fixed maturity plans that have entered the picture and may well replace conventional income plans.
What are Fixed Maturity Plans (FMPs)?
FMPs or fixed maturity plans are closed-ended debt funds that have a fixed period of maturity. In contrast to other open-ended debt funds, fixed maturity plans are not offered for investors to subscribe to continuously. Any fund house providing fixed maturity plans will launch a New Fund Offer or NFO that will have a date of opening and a date of closing. You can invest in the fixed maturity plan in question only during this period. After the date of closing, the offer is null and void.
Fixed maturity plans can be invested through the mutual fund route. Usually, FMPs in mutual funds invest in instruments of debt such as money market instruments, certificates of deposit (CDs), corporate bonds, commercial papers (CPs), etc. If fixed maturity plans are desired through mutual funds, the fund invests in securities that may potentially yield returns in a specific maturity period. Although these kinds of funds do not operate like regular mutual funds, the terms may be interchanged in casual use. Bank fixed deposits (FDs) are another way that you can invest your capital in a fixed-maturity vehicle.
How are Fixed Maturity Plans different from other debt funds?
A fixed maturity plan in a mutual fund follows a different process of investment compared to a regular mutual fund. As you may know, in a regular mutual fund, a portfolio of securities is offered for investment and several investors may pool capital together to invest in that fund (the same fund). In a mutual fund, the activities of the portfolio are managed by a fund manager who may change the allocation of assets to the fund to meet the needs of investors more appropriately and maximise returns.
On the other hand, fixed maturity plans stipulate a purchase-and-hold strategy by the manager of the fund. These are fixed plans for particular predetermined maturity periods, and debt securities are not bought and sold with frequency. This enables FMPs to maintain expense ratios at low levels relative to regular funds. In a regular mutual fund of debt securities, the securities may be purchased and sold at the discretion of the fund manager and have no fixed maturity periods.
FMPs Vs FDs
Once you know what an FMP is in a mutual fund, you may understand how an FMP is distinguished from other funds. With bank fixed deposits offering lower and lower rates of interest with each passing year, investors are now looking to fixed maturity plans for more lucrative avenues of investment. When comparing FDs and FMPs, remember that while they share similarities, they also have differences. Both require fixed-term investments, available in various maturity periods. However, FMPs differ from FDs in terms of their generated returns.
When you invest your capital in a fixed deposit (FD), you are guaranteed returns that are based on the interest that the FD delivers. This is a fixed percentage so you are assured returns for a specific period of maturity. In contrast, fixed maturity plans offer you indicative yields. They are not guaranteed. What does this mean? It means that there is a possibility of the returns you actually receive being lower or higher than those indicated at the launch of the fund offer.
An FMP in a mutual fund may be taxed differently relative to an FD too. In the dividend option of investment in an FMP, a DDT tax must be paid. In the growth option, the investor is taxed as per capital gains. With regard to an FD, the interest that is earned is added to the investor’s income and taxed according to the income slab. Another point of difference between fixed maturity plans and fixed deposits is that liquidity is restricted in fixed maturity plans. Contrastingly, in fixed deposits, there is a possibility of premature redemption, offering you an option to liquidate the investment when you wish to.
Who should invest in FMPs?
You may want to invest in an FMP online, but before you jump in to invest, you should consider whether this suits your investment requirements. FMPs may suit investors who require returns that are higher than those delivered by regular FDs and can tolerate frequent fluctuations in the net asset value (NAV) of the fund. If you compare FMPs to regular equity mutual funds, they may prove to be potentially less risky and give you possibly lower returns. However, when compared to FDs, returns may be higher, but there is the risk of NAV fluctuations.
Things to Consider Before Investing in Fixed Maturity Plans
It is a general rule of thumb in any investment ecosystem that you do some thinking before you invest your capital. The things you must consider before you take your investment decisions are mentioned below:
- Consider Returns and Liquidity: Your investment should match your own patterns of investing and attitudes toward investment, not to mention your financial plans. You should note that FMPs don’t offer you liquidity, but regular FDs and mutual funds do. Additionally, FMPs may offer high returns in the long run, compared to FDs, but these are not assured.
- Consider Tax Benefits: When you earn interest on FDs, your taxation may be high if you fall under the high-income slab with regard to taxation. FMPs may give you the benefit of lower taxation due to the advantage of indexation via long-term capital gains.
Final Lines on Fixed Maturity Plans
Every investor is different and you should follow your own goals towards investment. FMPs have many pros for those investors who wish to earn higher returns than those that an FD affords, and can withstand fixed maturity periods without liquidity. Also, if you fall within the income slab of “high-income”, you may end up paying less in taxes than if you were to invest in regular fixed deposits. Once you know your own investment objectives you can explore different plans and head over to Angel One to open a Demat account and invest conveniently.
FAQs
What is FMP in a mutual fund?
Fixed Maturity Plans are close-ended debt mutual funds that have fixed maturity dates. FMPs invest their capital in a basket of debt securities having matching maturity profiles.
How do FMPs operate?
FMPs pool investors’ money and invest in a well-diversified blend of debt instruments like government securities, money market instruments, corporate bonds, etc. The fund manager holds these securities till a maturity date, to minimise credit risk and interest rate risk.
Can I close an FMP before its date of maturity?
FMPs typically have fixed maturity periods and may not be available for redemption. This is why they are called close-ended funds. However, when you invest, it is worth checking whether specific FMPs may offer redemption with some conditions attached.
Do FMPs suit all investors?
FMPs may be suited to those investors searching for fixed-income investments with predefined maturity periods and possible stable returns. They may not be suited to you if you desire capital appreciation or liquidity.
