Fixed maturity plans are close-ended debt funds, meaning investments can be made only during the time of a new fund offer. It comes with a fixed maturity period and invests across debt instruments such as high rated securities and corporate bonds. These are designed to ensure that investors get a predictable rate of return, and at the same time tax-efficient, against the instability of interest rates.
1. What are Fixed Maturity Plans?
Fixed maturity plans primarily invest in fixed income instruments such as a certificate of deposit or bonds that lock in the yields that are currently available. This is done to eliminate interest rate fluctuation faced by debt markets. Fixed maturity plans are close-ended mutual fund schemes with a pre-defined maturity. The tenure varies from thirty days to five years. The most commonly available tenures range from thirty days to 180 days, 370 days and 395 days.
2. How are Fixed Deposits different from Fixed Maturity Plans?
A lot of people confuse a fixed maturity plan with a bank fixed deposit. Though the lock-in tenure is a common factor, fixed maturity plans are debt funds that invest predominantly in company debt and government securities. They do not carry any component of equity barring the exception when a fixed maturity plan opts for a limited element of equity.
|Returns||Guaranteed returns||Market Indicative Returns|
|Tax||Interest income is added to your annual income and taxed as per the applicable slab.||=> In FMP-Dividend – a Dividend Distribution Tax [DDT] is levied with the benefit of indexation
=> In FMP-Growth – Capital gains tax apply with the benefit of indexation
|Maturity Period||Varying maturity period options depending on individuals||Varying maturity period options depending on banks|
|Liquidity||Ease of premature redemption (with penalty), higher liquidity||Restricted liquidity|
3. What are the Objectives of Fixed Maturity Plans?
The primary objective of a fixed maturity plan is to generate steady returns over a fixed period. This plan also protects investors from market fluctuations. Fixed maturity plans are not available for subscription continuously therefore, the fund house come up with new fund offer (NFO) for a specific duration. NFO has an opening date and a closing date. You may invest in the NFO only during these days. Upon expiry of the closing date, the offer to invest ceases to exist.
4. What are the Features of Fixed Maturity Plans?
a. Fixed Tenure
Fixed maturity plans offer investors an option of choosing a plan that suits their investment horizon and their cash flow needs. Investors get to know in advance approximately how much returns they would get by investing at the NFO stage. The investments made in FMPs are fixed and cannot be withdrawn until they mature.
b. Closed-ended Funds
The investment option is made available only during the initial offer period of the scheme, and the redemption is allowed only at the time of maturity. There is an option though, where unitholders who have units held in Demat mode, can sell their units on the stock exchange which have units of a fixed maturity plan schemes listed. This way, they can exit the fixed maturity plan ahead of its tenure.
c. Investment Strategy
Fixed maturity plans invest in commercial papers (CP), certificate of deposits (CD), corporate bonds, money market instruments, government-issued securities, and non-convertible debentures (NCD) of high rated and reputed companies. The maturities fall in line with the tenure of the scheme.
d. Sensitivity to Interest Rates
Fixed maturity plans have minimum exposure to the interest rate risk as the fund holds the instruments until maturity, which allows it to yield a relatively fixed rate of return.
e. Credit Risk
Since fixed maturity plans invest predominantly in high rated credit instruments, the risk of default is minimised. Also, the risk of liquidity is minimal.
f. Tax Implications
One of the areas where fixed maturity plans win over fixed deposits is the tax-efficiency. When opting for a tenure longer than a year, investors can benefit from indexation to leverage their tax liability against inflation. Triple indexation gives investors the advantage of indexing their investment to inflation for four years while they remain invested for three years and over.
g. Balancing of Portfolio
Fixed maturity plans offer stable returns throughout the tenure and work as an asset allocation tool, and this allows the scheme to find investors from a broad investor base.
5. Current Fixed Maturity Plans
|Fund Name||Duration (in days)||Opening date||Closing date|
|SBI Fixed Maturity Plan (FMP) – Series 23 (110 Days)- Direct Plan||1106||5 November 2019||13 November 2019|
|SBI Fixed Maturity Plan (FMP) – Series 23 (110 Days)- Regular Plan||1106||5 November 2019||13 November 2019|