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A wide variety of choices is one of the main factors that pull investors towards mutual fund investments. There is a unique investment plan to meet the needs of every investor – be it the ones with high expectations on returns or the ones with a low-risk appetite.
Today’s article discusses one such option for investors with low-risk tolerance – fixed maturity plans. Let’s learn in detail the meaning, features and benefits of FMP in mutual funds.
What is a fixed maturity plan in mutual funds?
A Fixed Maturity Plan (FMP) is a specific type of close-ended debt fund that invests in fixed-income instruments like government securities, bonds and other short-term money market instruments.
These plans are usually for short-term investors looking for a maturity period of five years. The fund invests in securities with similar maturity.
Since these are close-ended funds, investors can subscribe to them only during NFOs (New Fund Offers) and must wait until maturity for redemption.
Close-ended funds
A close-ended fund is a type of mutual fund where the number of units issued to the public is fixed during the New Fund Offer (NFO). Hence, no new investors can enter the fund directly. However, existing investors can sell their shares in the secondary market through which new investors can enter the fund.
Features of FMPs in mutual funds
- Fixed maturity plans have a pre-determined maturity and a lock-in period. So, these plans do not allow investors to redeem their holdings until the lock-in period.
- Funds are majorly invested in short to medium-term debt instruments, making them less risky.
- Since these are close-ended schemes, they do not allow new investors to enter after the NFO.
- FMP offers indexation benefits to investors while calculating capital gains. Indexation is a feature that allows investors to factor in the component of inflation and the related reduction in the value of their investments while calculating their tax liabilities.
- Funds held in the short term for three years or less are subject to taxes at regular income tax rates. Long-term capital gains are taxed at 20% after considering indexation.
Benefits and risks of FMPs
Fixed maturity plans reduce the interest rate risks associated with debt instruments, as they are held until maturity. Such schemes also focus on investing in high-quality debt instruments, reducing the credit risk, too. Besides, they also allow investors to reap the benefits of indexation.
However, like every other financial instrument, this mutual fund scheme has limitations, too. Since it invests entirely in debt, the scheme offers stability, but the returns are low. Since the scheme has a lock-in period, the liquidity is less. Investors may have to pay an exit load for premature withdrawal, which can make the costs higher, compromising profits. Similarly, it is a close-ended scheme, because of which investors have to pay an entry load to enter the fund after the NFO.
How are FMPs different from other debt funds?
Debt funds are more flexible compared to fixed maturity plans. They do not have restrictions on the maturity period or the entry time. They are open-ended schemes and allow investors to enter the fund at any time.
However, regular debt funds are more prone to risks such as default risk and interest rate risks. Besides, debt funds require fund managers to involve themselves more actively to balance the portfolio, because of which the expense ratio may be higher. Fixed maturity plans, on the other hand, require investors to hold their assets till maturity, which reduces the fund manager’s role to rebalance, due to which the expense ratio is smaller.
Should you invest in a fixed maturity plan?
A fixed maturity plan works best for investors seeking low-risk and stable investment options. Since these plans disclose the returns during the opening of the fund, it helps organised investors plan their finances better.
Hence, it is most suitable for investors who do not want surprises in their returns or rapid wealth generation.
Bottomline
Fixed maturity plans are close-ended schemes that invest in debt securities. These plans have a lock-in period that restricts withdrawal or entry to the fund at the investor’s wish.
These funds are known to invest in high-quality debt instruments that offer regular returns to investors at low risks. So, if your risk-tolerating capacity is limited, don’t forget to consider FMP while making your decision.
FAQs
Fixed maturity plans are relatively safe since they focus only on debt instruments. Though the level of associated risks like default and interest rate risks are low, the scheme is not entirely risk-free.
Fixed deposits are facilities provided by banks, and they offer guaranteed returns. FMPs invest in credit securities with high creditworthiness, however, returns are not guaranteed. The rate of return on FMPs are slightly better than those of FDs.
No, FMPs are close-ended schemes and cannot be redeemed before maturity. Investors may have to pay heavy exit loads to withdraw prematurely from the fund.
Some top FMPs in the recent times are Nippon India Interval Fund Quarterly Interval Fund Series III (G), UTI Quarterly Interval Fund I Plan DIRECT (G), ICICI Prudential Constant Maturity Gilt Direct Rnvstmnt of Inc Dist cum Cap Wdrl, IDFC Government Securities Fund Investment Plan – Direct Plan – Growth, etc.
Regular debt funds, unlike FMPs, allow withdrawals at any time, unless the fund has a lock-in period. However, it is suggested to hold mutual funds for atleast 3 to 5 years to earn the best returns.
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