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 a FMP only during the new fund offer (NFO) period. Subsequent to completion of the NFO period, no new investments can be made into a 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:
- CBLOs (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 a 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 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 taxation rules including indexation benefits are applicable to capital gains from these non-equity investments. Indexation provides investors 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 redemption of scheme units cannot be made prior to maturity of the FMP schemes, these funds have potentially low levels of liquidity. In case you want to redeem your FMP investments prior to 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 with respect to 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, low potential risk does not mean zero risk 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 are applicable with 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 individual scheme (typically 3-4 years)||Varies by bank (typically 7 days to 10 years)|