When it comes to investing, not everyone is looking for high-risk, high-reward options like equities. Some investors prefer stability, predictability, and a clear idea of when they will get their money back. Fixed Maturity Plans (FMPs) are designed for exactly such investors. These are a type of debt mutual fund that invests in fixed-income securities such as bonds, certificates of deposit, commercial papers, and other similar instruments.
What makes them unique is that they come with a fixed maturity date. This means your money is locked in for a specific period, ranging anywhere from a few months to a few years. If you wish to exit earlier, you may need to sell your units on the secondary market, provided a buyer is available. FMPs are therefore best suited for investors who want steady returns without exposing themselves to too much market risk.
This guide will help you understand everything about Fixed Maturity Plans—from how they work to their features, benefits, and drawbacks. By the end, you’ll be able to judge whether FMPs align with your financial goals and risk appetite. If you’re weighing whether to keep funds locked in FMPs or explore more flexible options, understanding mutual fund choices can help you balance stability with growth potential.
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What are Fixed Maturity Plans (FMPs)?
A Fixed Maturity Plan (FMP) is a closed-ended mutual fund scheme that primarily invests in debt securities with a maturity date matching that of the fund. This structure allows fund managers to align the scheme’s maturity with the underlying instruments, ensuring stability of returns.
The duration of FMPs can range from as little as one month to as long as five years. For example, a three-year FMP will generally invest in debt securities maturing in three years. This way, the scheme is insulated from short-term market volatility and provides investors with a predictable outcome.
Unlike other debt funds that actively trade securities, FMPs follow a buy-and-hold strategy. This approach keeps portfolio turnover low, which in turn helps reduce fund management expenses. As a result, FMPs often carry a lower expense ratio compared to actively managed debt funds. If you prefer not to commit to locked-in schemes like FMPs, mutual funds with flexible withdrawal options might suit your financial goals better. Explore Top-Performing Mutual Funds
How do FMPs work?
The primary objective of an FMP is to minimise interest rate risk while offering stable returns. Typically, when interest rates rise, the market value of debt securities falls, and vice versa. However, FMPs are less affected by such fluctuations because they are closed-ended in nature. Once you invest, the securities are held until maturity, and the yield is fixed upfront.
This structure provides investors with predictable returns over the tenure of the scheme. Since the portfolio does not undergo frequent changes, investors are largely shielded from day-to-day market movements. Essentially, FMPs work like a bridge between traditional fixed deposits and open-ended debt mutual funds, offering a blend of stability, predictability, and relatively better post-tax efficiency. For investors who want regular investments without worrying about timing markets, SIPs in mutual funds offer an alternative with flexibility and long-term compounding benefits. Start Investing with Just Rs. 100.
What are features of fixed maturity plans?
Fixed Maturity Plans are different from regular mutual funds because they operate with a clear timeline and structure. Here are some defining features:
Closed-ended scheme: You can invest only during the New Fund Offer (NFO) period, after which subscriptions are closed. Once invested, your money stays locked until the maturity date.
Defined maturity period: The maturity period could be a few months to a few years, matching the duration of the debt securities held in the portfolio.
Debt-focused investment: Most FMPs invest in fixed-income instruments like bonds, treasury bills, and certificates of deposit. Equity exposure, if any, is minimal.
Predictability: Since securities are held to maturity, returns are relatively stable compared to open-ended debt funds.
Tax efficiency: FMPs benefit from indexation when held for more than three years, which can reduce long-term capital gains tax liability.
While FMPs have a rigid structure, mutual funds with open-ended options can provide more flexibility, diversification, and ease of liquidity for everyday investors. Open Your Mutual Fund Account Today
Advantages of fixed maturity plans
One of the biggest advantages of FMPs is stability. Since the securities are held until maturity, investors are shielded from short-term volatility. This is especially attractive to those who don’t want to constantly monitor markets.
Another key benefit is tax efficiency. If you hold an FMP for more than three years, you qualify for long-term capital gains taxation with indexation benefits. This means inflation is factored in while calculating gains, effectively reducing your tax burden compared to traditional fixed deposits.
FMPs also offer predictable returns, as the underlying securities are chosen to align with the scheme’s maturity. While returns are not guaranteed, they are far less volatile compared to many other mutual fund categories.
In addition, the lower expense ratio due to the buy-and-hold strategy makes them cost-effective. This can make a noticeable difference in the net returns, especially for long-term investors.
However, if you’re looking for a balance of growth potential with better liquidity, equity or hybrid mutual funds might serve as a smarter long-term alternative. Explore Mutual Fund Options Now
Disadvantages of fixed maturity plans
Despite their benefits, FMPs are not without limitations. The first drawback is low liquidity. Since they are closed-ended, you cannot redeem your units before maturity except by selling them on the stock exchange—something that may not always be possible if trading volumes are low.
Second, while returns are relatively stable, they are not guaranteed. Unlike a fixed deposit, where the bank assures a certain rate, FMPs depend on the performance of the underlying securities. If an issuer defaults, it can affect your returns.
Another limitation is the restricted investment window. You can invest in an FMP only when it is launched during the NFO. This means you must align your investment timing with the fund’s availability, which may not always match your financial plans.
Who should invest in fixed maturity plans?
Fixed Maturity Plans are best suited for investors who want predictable outcomes without daily market fluctuations. They work well for those with a medium-term investment horizon of at least three years, as the indexation benefit makes post-tax returns more attractive.
Conservative investors who prefer debt-oriented schemes but want potentially better tax efficiency than fixed deposits may also find FMPs appealing. Additionally, those who have a specific financial goal—like saving for a child’s higher education or planning for a down payment in a few years—can use FMPs to match investment duration with their target timeline.
That said, FMPs are not ideal for individuals who require high liquidity or guaranteed returns. If easy access to funds is a priority, alternatives like liquid funds or traditional fixed deposits may be more appropriate.
Taxation of fixed maturity plans
Tax treatment is a major factor in the appeal of FMPs. If units are redeemed within three years, the gains are treated as short-term capital gains and taxed as per your income tax slab rate.
However, if the investment is held for more than three years, the gains qualify as long-term capital gains. In such cases, you are taxed at 20% with indexation benefit. Indexation allows you to adjust the purchase price for inflation, effectively reducing your taxable gains.
For example, suppose you invested Rs. 1,00,000 in an FMP and redeemed it after four years for Rs. 1,40,000. Without indexation, your gain would be Rs. 40,000. But if inflation-adjusted cost is calculated at Rs. 1,15,000, your taxable gain comes down to Rs. 25,000—significantly lowering your tax liability.
This makes FMPs highly tax-efficient for investors in higher income brackets who are willing to stay invested for longer durations.
FMP vs fixed deposit
Both FMPs and fixed deposits (FDs) cater to conservative investors, but they differ in important ways.
Return predictability: FDs offer guaranteed returns, while FMPs provide indicative returns that depend on underlying debt securities.
Liquidity: FDs generally allow premature withdrawal with a penalty, whereas FMPs are locked until maturity.
Taxation: FD interest is taxed as per your slab rate, making it less tax-efficient for those in higher slabs. In contrast, FMPs held for more than three years enjoy indexation benefits, reducing the effective tax outgo.
Market link: FDs are independent of market risks, but FMPs carry some risk, especially if an issuer defaults.
Risks of fixed maturity plans
While FMPs are positioned as relatively stable investments, they are not risk-free. One key risk is credit risk, where the issuer of the underlying debt security could default. Although fund managers typically select high-rated instruments, defaults cannot be ruled out.
Another concern is liquidity risk. Since FMPs are closed-ended, you cannot redeem them before maturity, unlike open-ended debt funds. While they are technically listed on exchanges, trading volumes are often very low, making it hard to sell before maturity.
There is also interest rate risk. If rates rise after the fund locks into its securities, the opportunity cost can reduce potential gains compared to newer debt products. While investors still receive their indicative returns, they may miss out on better opportunities available later.
Key takeaways
FMPs are close-ended debt funds with fixed maturity dates.
They invest primarily in fixed-income instruments like bonds, debentures, and money market securities.
The main appeal lies in predictable returns and tax efficiency when held for over three years.
Risks include credit defaults, liquidity issues, and interest rate changes.
They suit conservative investors with a medium-term horizon who can commit funds until maturity.
Conclusion
Fixed Maturity Plans offer a middle path between the predictability of fixed deposits and the potential tax efficiency of debt mutual funds. For investors in higher tax brackets who are comfortable locking in their funds, they can provide attractive post-tax returns.
However, they are not for everyone. If liquidity or guaranteed returns are your top priorities, you may want to consider alternatives like liquid funds or traditional FDs. But if you have a clear financial goal within a defined time horizon, FMPs can serve as a disciplined, tax-efficient option for building wealth.
