What Are Fixed Maturity Plans (FMPs) in Mutual Funds

Fixed Maturity Plan is a fixed tenure mutual fund scheme that invests its corpus in debt instruments maturing in line with the tenure of the scheme. Explore everything about FMP in this blog.
Fixed Maturity Plans
4 mins
26-April-2024

Fixed maturity plans (FMPs) are a type of debt mutual fund that invest in fixed income securities such as bonds, certificates of deposit, commercial papers, etc. They have a fixed maturity date, which means they lock in your money for a specified period of time, ranging from a few months to a few years. In case of redemption prior to maturity date, the investor needs to find a buyer in secondary market to sell the units. FMPs are suitable for investors who want to earn a steady and predictable return, without taking much risk.

What are Fixed Maturity Plans (FMPs)?

Fixed Maturity Plans (FMPs) are investment vehicles categorised as close-ended funds that operate for a predetermined period, investing primarily in debt securities. These securities are typically issued by various entities, including government and private institutions, seeking capital for business expansion or operational needs. The duration of an FMP can vary from as short as one month to as long as five years, aligning with the maturity period of the underlying debt securities. For example, a 3-year FMP will typically invest in debt instruments with a maturity of three years, providing a shield against market volatility.

Unlike some other debt funds, FMP fund managers employ a buy-and-hold strategy, refraining from frequent trading of debt securities. This approach helps maintain a lower expense ratio for FMPs compared to other debt funds, as there is less turnover of securities within the fund's portfolio.

What are features of fixed maturity plans?

  1. Fixed duration of investment: FMPs feature a predetermined maturity period, locking in investors' funds from the time of New Fund Offer (NFO) subscription until maturity. Typically extending beyond 3 years, the maturity period commences from the allocation of units, enabling investors to leverage indexation benefits.
  2. Limited subscription window: As close-ended funds, FMPs restrict investment opportunities to the NFO phase. Once this period concludes, the fund ceases to accept additional investments, allowing investors to redeem units only after the fund matures.
  3. Reduced sensitivity to interest rate changes: Due to a significant portion of investments held until maturity, FMPs exhibit minimal sensitivity to interest rate fluctuations. By securing interest rates for extended periods, FMPs offer investors stability amid declining interest rate scenarios.
  4. Lower exposure to credit risks: FMPs predominantly allocate funds to high-quality debt instruments and money market securities, mitigating potential credit risks associated with lower-quality assets.
  5. Tax advantages through indexation: With many FMPs boasting maturity periods exceeding 3 years, they qualify for long-term capital gains tax treatment coupled with indexation benefits. Indexation, factoring in inflation, reduces investors' overall tax liabilities, enhancing the attractiveness of FMP investments.

Advantages of fixed maturity plans

  • Higher return than bank deposits, as the FMP invests in higher yielding securities.
  • Lower interest rate risk than other debt funds, as the FMP holds the securities till maturity.
  • Better tax efficiency than bank deposits, as the FMP has a lower tax rate and indexation benefit.

How is FMP different from other debt funds?

  • FMPs have a fixed tenure, while other debt funds are open-ended and can be redeemed anytime.
  • FMPs have a low interest rate risk, as they hold the securities till maturity, while other debt funds are subject to market fluctuations.
  • FMPs have a predictable return, as they disclose the portfolio and yield at the time of launch, while other debt funds do not.

Who should invest in FMPs?

FMPs are ideal for investors who have a low risk appetite, a fixed investment horizon, and a specific financial goal. They can also help in tax planning.

Limitations of a fixed maturity plan

  • Lower liquidity than bank deposits and other debt funds, as the FMP has a lock-in period and exit load.
  • Higher credit risk than bank deposits, as the FMP invests in corporate bonds and other securities that may default.
  • No guarantee of return, as the FMP is subject to market and regulatory changes.

Taxation on fixed maturity plans

Dividend income on mutual funds are taxed at respective tax slab rates.

Where do fixed maturity plans invest their corpus?

FMPs invest their corpus in fixed income securities such as corporate bonds, government securities, certificates of deposit, commercial papers, treasury bills, etc. that match their maturity date.

Would FMPs also classify as a debt fund category?

Yes, FMPs are a type of debt fund category, as they invest in fixed income securities. They are classified as low duration, short duration, or medium duration funds.

Differences between FMPs and FDs

  • FMPs are mutual funds, while FDs are bank deposits. They are regulated by different authorities and have different tax implications. FMPs are regulated by the Securities and Exchange Board of India (SEBI), while FDs are regulated by the Reserve Bank of India (RBI). FMPs are taxed as capital gains, while FDs are taxed as income.
  • FMPs generally offer a higher return than FDs, as they invest in higher yielding securities, while FDs offer a fixed and lower interest rate. For example, a 3-year FMP may offer a yield of 7.5%, while a 3-year FD may offer an interest rate of 6%. However, the return of FMPs is not guaranteed, as it depends on the performance of the underlying securities.
  • FMPs have a higher credit risk than FDs, as they invest in corporate bonds and other securities that may default, while FDs are backed by the financial institute proving the FD. For example, an FMP may invest in an AA rated bond that may default due to financial distress, while a Bank FD is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to Rs. 5 lakh per depositor per bank.
  • FMPs have a lower inflation risk than FDs, as they have a higher post-tax return, while FDs may lose value due to inflation. For example, a 3-year FMP may have a post-tax return of 6.4%, assuming a 20% tax rate with indexation benefit, while a 3-year FD may have a post-tax return of 4.8%, assuming a 30% tax rate. However, the inflation-adjusted return of FMPs may vary depending on the inflation rate and the indexation factor.

Things to consider before investing in FMPs

  • The quality and rating of the underlying securities, as they determine the credit risk and return of the FMP.
  • The duration and maturity of the FMP, as they affect the liquidity and interest rate risk of the FMP.
  • The tax implications of the FMP, as they depend on the holding period and the type of securities.

Conclusion

Fixed maturity plans are a good option for investors who want to earn a fixed and assured return, without taking much risk. They are also tax-efficient and have a low interest rate risk. However, they have some limitations such as low liquidity, high credit risk, and no guarantee of return. Therefore, investors should carefully consider their financial goals, risk profile, and investment horizon before investing in FMPs.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

Lumpsum Calculator

Mutual Fund Calculator

Step Up SIP Calculator

Brokerage Calculator

FD calculator

Frequently asked questions

Are FMPs safe to invest in?

FMPs are relatively safe as they have low credit and interest rate risk, but they are not risk-free. They may face default or liquidity risk.

When can I invest in fixed maturity plans?

You can invest in FMPs only during the new fund offer (NFO) period of the scheme, which is usually open for a few days or weeks.

What is a fixed maturity period?

A fixed maturity period is the duration for which the FMP scheme is open, and the investors have to stay invested. It can range from a few months to years.

Are fixed maturity plans better than fixed deposits?

FMPs and FDs have different features and advantages. FMPs may offer higher returns, lower tax, and indexation benefit, while FDs offer guaranteed returns, higher liquidity, and safety.

What is a fixed maturity plan?

FMPs are closed-end debt mutual funds that invest in debt or money market instruments with a fixed maturity date. They offer indicative returns and tax benefits.

Which is better – FMP or FD?

The choice between FMP and FD depends on your risk appetite, investment horizon, and tax bracket. You can compare the returns, tax, and liquidity of both options before investing.

Do fixed maturity plans invite tax?

FMPs are subject to capital gains tax, which varies depending on the holding period and the type of plan. FMPs held for more than three years can avail indexation benefit, which reduces the tax liability.

Do FMPs offer liquidity?

FMPs do not offer much liquidity as they are locked-in for the fixed maturity period. However, some FMPs may offer a secondary market facility, where you can sell your units to another investor.

Is FMP a debt fund?

Yes, FMP (Fixed Maturity Plan) is a type of debt fund that invests in fixed-income securities with a predetermined maturity period.

Which is better FD or FMP?

It depends on the investor's preference for liquidity and returns. FMPs may offer potentially higher returns than fixed deposits (FDs), but they lack liquidity as funds are locked in until maturity.

Is fixed maturity plan safe?

FMPs are considered relatively safe as they invest in fixed-income securities with predetermined maturities, reducing exposure to market volatility. However, like all investments, they carry some level of risk.

Are fixed maturity plans taxable?

Yes, returns from FMPs are subject to taxation. Short-term capital gains (if held for less than 3 years) are taxed at the investor's applicable income tax rate, while long-term capital gains (if held for 3 years or more) are taxed with indexation benefits.

What are the risks of FMP?

Risks associated with FMPs include credit risk, interest rate risk, and liquidity risk. Additionally, changes in economic conditions and regulatory changes can impact FMP returns.

What happens when FMP matures?

When an FMP matures, investors have the option to redeem their investment at the prevailing Net Asset Value (NAV) or roll over their investment into another FMP or mutual fund scheme.

What is the difference between target maturity fund and FMP?

Target maturity funds invest in a mix of debt and equity securities with a specific maturity date, while FMPs primarily invest in fixed-income securities with a predetermined maturity period. Target maturity funds offer more diversification but may have higher risk exposure.

Is FMP a close-ended scheme?

Yes, FMPs are close-ended schemes as they have a fixed maturity period and do not allow continuous redemption or subscription after the New Fund Offer (NFO) period ends.

How to invest in FMP?

Investors can invest in FMPs through various channels such as mutual fund platforms, stockbrokers, or directly through Asset Management Companies (AMCs) during the NFO period.

Show More Show Less