Best Fixed Maturity Plans: Meaning, Objectives and More
Updated on: Mar 17th, 2023
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5 min read
Fixed maturity plans are close-ended debt funds. These mutual funds are designed to ensure that investors get a predictable rate of return.
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:
ICICI Prudential Constant Maturity Gilt Direct Rnvstmnt of Inc Dist cum Cap WdrlWho 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:
- Fixed Tenure
- Closed-ended Funds
- Investment Strategy
- Sensitivity to Interest Rates
- Credit Risk
- Tax Implications
- Balancing of Portfolio
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:
- Market risk
- Credit risk
- Liquidity risk
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:
- Lower risk levels:
- Stability:
Quick Summary
Fixed maturity plans are close-ended debt funds that guarantee a fixed rate of return, commonly investing in fixed income instruments to avoid interest rate fluctuations. They have pre-defined maturity and varying tenures. Features include closed-ended structure, investment strategy, and sensitivity to interest rates. Dividends and capital gains are taxed differently. Risks associated include market, credit, and liquidity risks. FMPs are different from fixed deposits in terms of returns, tax treatment, and liquidity.
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