FMPs are mutual funds which have become the latest alternative investment havens to the conventional Fixed Deposits. Gradually, these have become favorites among the fixed income seeking investors. Looking at their flexibility and ability to offer better returns, some investors are even replacing their FD investments with FMPs.
What are Fixed Maturity Plans (FMPs)?
Fixed Maturity Plans or FMPs are closed-end debt funds having a fixed maturity period. Unlike other open-ended debt funds, FMPs are not available for subscription on a continuous basis.
The fund house comes up with a New Fund Offer (NFO) for a specific duration. NFO will have 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.
FMPs usually invest in debt instruments like certificate of deposits (CDs), , money market instruments, , corporate bonds, commercial papers (CPs) and bank fixed deposits.
Based on the duration of the scheme, the fund manager allocates your money in instruments of similar maturity. For example, if FMP is for 5 years, then the fund manager invests in a corporate bond having a maturity of five years.
Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy. There is no frequent buying and selling of debt securities like other debt funds. This helps to keep the expense ratio of FMPs at lower level vis-a-vis other debt funds.
Being a debt instrument, FMPs and FDs have a lot of similarities between them. Both require you to stay invested for a fixed duration. Both of them are available in varying maturities to suit your convenience.
However, FMPs are a stark contrast to FDs from a returns perspective. Unlike the guaranteed returns that reflects on the FD certificate, FMPs offer an indicative yield. It means that the returns offered by FMPs are not assured but indicative in nature – there is a chance of the actual returns being higher or lower than the returns indicated during the NFO.
Many people compare FMPs with bank FDs. However, FMPs and FDs differ more ways than one:
|Returns||Guaranteed returns||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
=> In FMP-Growth – Capital gains tax apply
|Maturity Period||Varying maturity period options||Varying maturity period options|
|Liquidity||Ease of premature redemption, higher liquidity||Restricted liquidity|
Who should invest in Fixed Maturity Plans (FMPs)?
The value of your FMP is reflected by the fund Net Asset Value (NAV). You will get to know the NAV of the FMP on a daily basis. The point to be underscored here is that NAV of the fund fluctuates everyday. It is affected by the interest rate movements in the economy. This makes FMPs riskier than FDs.
Thus FMPs are ideal for those investors who need returns higher than a regular FD but may digest the frequent NAV fluctuations. Compared to equity funds, FMPs are low risk-low return investments.
Due to the restricted liquidity of these funds, it is usually recommended to investors who would not need the funds for the tenure of the scheme.
Post 2014, due to a change in the tax treatment of debt funds, investors need to stay invested at least for three years to take the benefit of indexation on long-term capital gains tax. Hence, FMPs are ideal for those who have no liquidity requirement for at least three years.
While FDs assure returns, FMPs indicate a probable return. You need to understand the difference and expect a small change in the returns indicated during the initial buying phase.
FMPs can also be useful for investors in the high income tax brackets. These investors usually end up paying huge amounts as tax on the interest earned on the FDs held by them. FMPs give them the option of earning similar returns at a much lower tax rate (due to indexation benefit in long term capital gains).
If you are thinking about investing in Fixed Maturity Plans, remember – these are not fixed deposits but mutual funds schemes.
Look for the investment objective of the scheme, indicated yield and investment strategy. Once you are in sync with these, invest an amount that you can leave invested for three years and reap tax efficient returns.