Best Fixed Maturity Plans: Meaning, Objectives and More

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Fixed maturity plans are close-ended debt funds. These mutual funds are designed to ensure that investors get a predictable rate of return. We have covered the following in this article:

What are Fixed Maturity Plans?

Fixed maturity plans, commonly referred to as FMPs, are a class of debt funds that 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 30 days to 5 years. The most commonly available tenures range from thirty days to 180 days, 370 days and 395 days.

Top 10 Fixed Maturity Plans

The table below shows the top-performing FMPS:

Mutual fund 5 Yr. Returns 3 Yr. Returns Min. Investment Rating

Who Should Invest in Fixed Maturity Plans?

The FMPs are an ideal investment option for those investors who are not willing to take higher levels of risk. If you are looking to earn much higher returns than bank deposits, then FMPs are apt for you. However, like any other investment option, even FMPs are not safe.

The net asset value (NAV) of these funds vary with changes in interest rate fluctuation and several economic factors. You may consider investing in an FMP if you are willing to let your money be locked-in until the fund matures. Therefore, you have to be aware of the duration before investing.

What are the Features of Fixed Maturity Plans?

The following are some of the features of fixed maturity plans:

  1. Fixed Tenure
  2. 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 The investments made in FMPs are fixed and cannot be withdrawn until they mature.

  3. Closed-ended Funds
  4. 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 scheme listed. This way, they can exit the fixed maturity plan ahead of its tenure.

  5. Investment Strategy
  6. 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.

  7. Sensitivity to Interest Rates
  8. 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.

  9. Credit Risk
  10. Since fixed maturity plans invest predominantly in high rated credit instruments, the risk of default is minimised. Also, the risk of liquidity is minimal.

  11. Tax Implications
  12. 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.

  13. Balancing of Portfolio
  14. 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.

Taxation of Fixed Maturity Plans

Dividends offered by all mutual funds, if any, are added to your overall income and taxed as per the income tax slab you fall under. This is referred to as the classical way of taxing dividends and was introduced in the Budget 2020. Before that, dividends were tax-free in the hands of investors as the fund houses paid dividend distribution tax (DDT).

Short-term capital gains realised on redeeming your units within a holding period of three years are added to your overall income and taxed as per the income tax slab rate you fall under. Long-term capital gains realised on selling your units after a holding period of three years are taxed at a rate of 20% after indexation.

Risks Associated With Fixed Maturity Plans

The fixed maturity plans come attached with the following risks:

  1. Market risk
  2. This is the probability of the fluctuation in the fund’s NAV due to the movements in the prices of the underlying securities. Several macro and microeconomic factors contribute to market risk.

  3. Credit risk
  4. This is the probability of the fund’s NAV collapsing due to the change in the credit ratings of the underlying assets of the fund. Credit risk refers to the risk of the issuers of the securities not obliging by their agreement to make coupon payments and returning principal invested at the time of maturity.

  5. Liquidity risk
  6. This is the risk of the fund manager being unable to sell the underlying assets without taking a significant hit.

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.

Parameter FDs FMPs
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

Advantages of Fixed Maturity Plans

The following are the most significant advantages of investing in FMPs:

  1. Lower risk levels:
  2. These funds carry lower levels of risk as they invest in high-rated debt and money market securities of well-established companies. The fund managers pick only the top-rated securities to constitute the portfolio.

  3. Stability:
  4. Since FMPs are locked-in for a particular duration, your investment goes through both market ups and downs. This will help the performance of these funds stabilise over time. FMPs are known to be one of the least affected investments by the market movements.