What is a Fixed Maturity Plan in Mutual Funds: Features, Benefits, and Who Should Invest?

Investors frequently seek stable and predictable investment options, and Fixed Maturity Plans (FMPs) have become a favored choice among mutual funds. As the name suggests, these funds have a set duration and invest in debt instruments that mature in sync with the fund’s maturity date. This setup provides a reliable and predictable cash flow, making FMPs suitable for conservative investors or those aiming to meet short-to-medium-term financial objectives.

 But what sets a Fixed Maturity Plan (FMP) apart from other mutual fund options? In order to know that Let’s dive deeper into this blog to better understand the Fixed Maturity Plan in Mutual Funds.

Fixed Maturity Plans (FMP)

A Fixed Maturity Plan (FMP) is a type of debt mutual fund with a set maturity period, usually ranging from a few months to up to five years. It aims to provide stable and predictable returns by investing in debt instruments like bonds, government securities, and commercial papers that mature around the same time as the fund. FMPs are typically accessed through mutual funds, which invest in a variety of debt instruments such as money market securities, certificates of deposit (CDs), corporate bonds, and commercial papers (CPs) to generate returns within a specific maturity period. While FMPs differ from regular mutual funds, the terms are often used interchangeably. Alternatively, bank fixed deposits (FDs) also offer a fixed-maturity investment option for those seeking steady returns.

Features of Fixed Maturity Plans

1. Closed – Ended Fund – FMPs are closed-ended schemes, meaning they can only be subscribed to during the New Fund Offer (NFO) period. After this period, investors cannot buy or sell units until the fund matures, except through the stock exchange where the fund is listed.

2. Fixed Maturity Period – FMPs have a predetermined investment period set at the time of launch. This helps fund managers align the maturity dates of the underlying securities with the scheme’s duration, minimizing interest rate risk.

3. Tax Efficiency – FMPs can be more tax-efficient, particularly for investors in higher tax brackets. If held for over three years, they are subject to long-term capital gains tax with indexation benefits, which can lower tax liabilities compared to other fixed-income investments.

4. Lower Risk – Since the investments in FMPs are held until maturity, they are less impacted by interest rate changes, making them a relatively safer choice compared to open-ended debt mutual funds.

Key Difference Between Fixed Deposit and Fixed Maturity Plan

Fixed Deposit – Fixed Deposits are among the most traditional investment options in India, provided by banks and financial institutions. They are a well-known type of term deposit where individuals invest their extra funds at a fixed interest rate for a set duration.

Fixed Maturity Plan – FMPs are closed-ended mutual funds that invest in fixed-income securities such as bonds, government securities, and corporate debt. They have a fixed maturity period, much like fixed deposits, but they offer different risk and return profiles.

Features	Fixed Deposit	Fixed Maturity Plan
Type of Investment	Bank or NBFC deposit	Mutual Fund scheme
Tenure	Ranges from 7 days to 10 years	Ranges from a few months to 5 years
Returns	Fixed interest rate; predictable	Market-linked returns; slightly variable
Risk Level	Very low risk; backed by banks/NBFCs	Low to moderate risk; dependent on credit quality
Liquidity	Can be withdrawn early (with penalty)	Locked-in until maturity; tradable on exchanges
Taxation	Taxed as per income slab; no indexation benefit	Long-term capital gains tax with indexation benefit
Suitability	Ideal for risk-averse investors seeking guaranteed returns	Suitable for investors with medium-term horizons looking for tax-efficient returns
Premature Withdrawal	Allowed with penalty	Not allowed; can be traded on stock exchanges
Safety of Principal	High; covered under Deposit Insurance up to ₹5 lakhs	Subject to credit risk of underlying securities

Benefits of a Fixed Maturity Plan

• Predictable Returns: Because FMPs invest in fixed-income securities that mature alongside the scheme’s maturity, the returns are fairly predictable, giving investors a sense of security.
• Potential for Higher Returns than FDs: FMPs can provide better post-tax returns compared to fixed deposits (FDs), particularly when taking indexation benefits into account.
• Diversification: FMPs invest in a diversified range of debt securities, which helps to mitigate the risk linked to individual securities.
• Lock-In Period Benefit: The lock-in period for an FMP discourages frequent withdrawals, encouraging investors to maintain a disciplined investment strategy.

Who Should Invest in a Fixed Maturity Plan?

Fixed Maturity Plans (FMPs) are ideal for investors who are seeking:

• Relatively Stable Returns: FMPs have the potential to provide stable returns over a set period, making them attractive to those who value predictability.
• Goal-Based Investments: They are well-suited for investors with specific financial objectives, as they offer a fixed investment duration.
• Risk Management: Investors looking to manage risk through a diversified portfolio of debt instruments may find FMPs appealing.
• Alternative to Fixed Deposits: Individuals aiming for slightly higher returns than traditional bank fixed deposits (FDs), with a similar risk level, might consider FMPs as an alternative.
• Market-Linked Returns: Those who are comfortable with returns influenced by market conditions, rather than guaranteed returns, can also look at FMPs.

Conclusion

Fixed Maturity Plans are an excellent option for investors seeking a predictable and relatively safe investment within the mutual fund arena. With their tax efficiency and the potential for higher returns compared to traditional fixed deposits, FMPs can be appealing for those with a defined investment horizon. However, it’s crucial to evaluate your liquidity needs and risk tolerance before investing in an FMP to ensure it aligns with your overall financial objectives.

Source : msn

For more investment option in mutual fund, refer to investment in SIP