Investing in Fixed Maturity Plans
Fixed Maturity Plans or FMPs are ideal for those who dread volatility and do not mind locking in their money for superior post-tax returns. FMPs are close-ended debt schemes that have a fixed horizon for maturity. This essentially means that they are open for a few days during the launch of the scheme and then closed until maturity that can range from one month to five years.
FMPs invest in debt instruments such as corporate or Government bonds, commercial papers (CPs), certificates of deposit (CDs) and other money market instruments. The debt instruments chosen for FMPs have maturities that are in line with the tenure of the scheme. Investors can scrutinize the scheme information document to see the quality of underlying debt securities that have been chosen for the FMPs. The objective of FMPs is to take a call on the interest rate cycle and choose suitable instruments that will yield best returns to the investors.
FMPs are open for investments only during their New Fund Offer (NFO) period and investors can redeem their capital with the income generated only upon the maturity of these funds. However, to provide the element of liquidity, FMPs are listed as tradeable securities on stock exchanges, so that investors have the choice of exiting by selling off their units in the stock exchange.
Benefits of FMPs
Unlike open-ended funds that may face volatility, owing to changes in the price of their underlying debt instruments once in a while, FMPs are locked until maturity. This strategy ensures that the returns are stable in case of FMPs.
Short-term capital gains tax is applied as per your income tax slab on any FMP with a tenure of less than 36 months. If you hold your FMPs for more than 3 years you can reap the benefits of indexation and get superior returns over a fixed deposit of the same tenure, especially if you are in the highest tax bracket.
When should you choose FMPs?
FMPs are ideal for investors who do not want to time the interest rate cycle and would rather keep their investments locked in close-ended funds. If you are an investor who wants to be safe from the volatility of interest rate risk and want to invest for the longer term (over three years) FMPs would yield superior rates.
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In a bid to provide higher income to its investors, FMPs invest in instruments that bear some credit risk. However, if the fund house you are choosing has a track record that has been satisfactory in the past, you have little to worry about. For those who want to invest for a long-term period over three years, FMPs can prove to be very tax efficient.