Best Fixed Maturity Plans: Features & Limitations

 

Fixed maturity plans (FMPs) are a special class of close-ended debt mutual funds that mature after completion of a pre-determined time period. Thus you can make investments in an FMP only during the new fund offer (NFO) period. After completion of the NFO period, no new investments can be made into an FMP scheme. What’s more, fixed maturity plan investments can be redeemed only after the scheme has matured and no premature redemption of units are allowed during the interim.

Key Investments of Fixed Maturity Plans

As a result of being classified as non-equity investments, the main investments of FMPs are various debt and money market instruments. The following are some of the more popular debt investments of FMPs:

•         CBS (collateralized borrowing and lending obligations)
•         Government Securities (G-Secs)
•         T-Bills (Treasury Bills)
•         Liquid scheme units
•         Repo and Reverse Repo Instruments
•         Highly-rated NCDs (non-convertible debentures)
•         Securitized Debt Instruments
•         CDs (certificate of deposits)
•         CPs (commercial papers) and
•         Various other cash-equivalent investments.

The above list of FMP investments is indicative and the allocation of individual instruments in the scheme’s portfolio, as well as their credit quality and residual maturity, may vary significantly from one FMP to another.

Features of Fixed Maturity Plans

The following are the key features of these schemes:

• Fixed Tenure: The maturity period of an FMP is fixed and once you have invested through NFO, your investment is essentially locked-in till maturity. The maturity period of FMPs is usually more than 3 years from the date of unit allocation. This ensures that indexation benefits can be obtained on FMP investments.
• Close-ended Schemes: This typically means that you can invest in the scheme only during the NFO period of the scheme. After completion of the NFO period, no additional investment can be made by investors and redemption of scheme units can only be made after the maturity of the scheme units.
• Potentially Low-Interest Rate Sensitivity: A majority of the investments made by these schemes are held till maturity hence FMPs tend to feature low levels of interest rate sensitivity. In effect, FMP investments allow you to lock-in interest rates for longer periods of time, which can be beneficial during a period of falling interest rates.
• Potentially Low Credit Risk: A majority of investments made by FMPs are made into high-quality debt and money market instruments that feature potentially low levels of credit risk for investors.
• Indexation Benefits on Returns: A majority of new FMPs feature a maturity period of 3 years or more. This ensures that long term capital gains tax rules including indexation benefits apply to capital gains from these non-equity investments. Indexation provides investors with the benefit of factoring in inflation, which reduces overall tax liability on gains. Read more about mutual fund taxation rules.

Limitations of Fixed Maturity Plans

The following are the key limitations of fixed maturity plan investments:

• Low Liquidity: Since the redemption of scheme units cannot be made before the maturity of the FMP schemes, these funds have potentially low levels of liquidity. In case you want to redeem your FMP investments before maturity, you can do so through the stock exchange where the scheme is listed. However, a Demat account is mandatory in case of redemptions made through stock exchanges and the trading volumes are often negligible.
• Locked-In Rates: While locked-in rates are an excellent choice during a falling interest rates regime, the same can become a problem during a period of rising interest rates. When market rates move upwards, locked-in rates can lead to missed opportunities concerning potentially higher returns coupled with possibly lower risk levels.
• Returns Not Guaranteed: Fixed Maturity Plans provide investors with the benefit of locked-in returns from instruments held till maturity and high-quality investments minimize the credit risk for investors. That said, the low potential risk does not mean zero risks for the investors and returns from FMPs are still market-linked. As a result, returns from FMPs are not guaranteed unlike other fixed return instruments such as fixed deposits.

Key Differences between FMPs and Fixed Deposits

Fixed maturity plans may sometimes be considered similar to fixed deposits by new investors. While these investments are similar in terms of the fact that they have fixed investment tenure, the following are some key differences between fixed maturity plans and fixed deposits:

Comparison Criteria	Fixed Maturity Plans	Fixed Deposit
Returns	Market – Linked Returns	Guaranteed Returns
Taxation	Capital Gains Taxation Rules apply to the  benefit of indexation	Taxation is as per IT slab rate of investor
Liquidity	Low Liquidity	Premature withdrawal options with penalties available (more liquid than FMPs)
Maturity Options	Varies for each scheme (typically 3-4 years)	Varies by a bank (typically 7 days to 10 years)

Also Know: Latest FD Interest Rates of different Banks/NBFCs

FAQs

Ques. Are fixed maturity plans taxable?

Ans. Fixed maturity plans, in most cases, have a maturity plan of 3 years. Hence, these plans are taxed as Debt funds for the long term and Long Term Capital Gains of 20% with indexation is applied.

Ques. Who should invest in a Fixed Maturity Plan?

Ans. Investors who are looking for higher returns in comparison to FDs and RDs and are willing to accept frequent market fluctuations. Additionally, investors must be willing to lock-in their funds for a time period of 3 years.

Ques. Is FMP better than FD?

Ans. FMPs tend to deliver higher returns than FDs. However, the risk involved in FMPs is also higher than that in FDs. Moreover, FMPs have a fixed maturity period, while FDs have the option of premature withdrawal.

Ques. Where does an FMP invest its corpus?

Ans. FMPs invest most of its corpus in fixed income securities such as Debt funds, Certificates of Deposit, Money Market Instruments, Corporate Bonds, Commercial Papers, and Bank FDs, etc. whose maturity period lies in line with FMP.

Ques. Is FMPs liquid?

Ans. No. Fixed Maturity Plans are not liquid as they have a fixed maturity period of 3 years.

List of Top Fixed Maturity Funds to Invest in 2020

SBI Fixed Maturity Plan (FMP) – Series 5 (92 Days) Direct – Dividend

SBI Fixed Maturity Plan (FMP) – Series 8 (1178 Days) Regular – Growth

Tata Fixed Maturity Plan Series 56 Scheme E Regular – Growth

Tata Fixed Maturity Plan Series 46 Scheme K Regular-Dividend

Tata Fixed Maturity Plan Series 31 Scheme C -Growth

Tata Fixed Maturity Plan Series 49 Scheme B Plan A-Growth

SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan

SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan