Fixed Maturity Plans (FMPs) are closed-end debt mutual funds that invest in fixed-income securities having a set maturity date. They are intended to give investors with consistent returns over a set investment horizon, making them an appealing choice for those seeking stability and capital preservation.
Key Features of Fixed Maturity Plans:
1) Fixed Tenure:
- FMPs have a set maturity time, which can range from a few months to several years. The tenure is determined at the time the plan is launched.
2) Closed-End Structure:
- Investors can only participate in FMPs during the first offering period. After the subscription period ends, no new investments are accepted until maturity.
3) Portfolio Composition:
- FMPs invest in a diverse portfolio of fixed-income instruments, including corporate bonds, government securities, and money market instruments, which expire in accordance with the fund’s term.
4) Predictable Results:
- Because the investments are maintained until maturity, FMPs provide reasonably predictable returns, which rely on the interest rates at the time of purchase and the credit quality of the underlying securities.
Benefits of Fixed Maturity Plans
1) Low risk:
- Because FMPs invest in debt instruments, they are less volatile than equity investments and hence more suitable for conservative investors.
2) Tax efficiency:
- FMPs held for more than three years benefit from long-term capital gains tax with indexation, which can significantly lower tax burden when compared to ordinary fixed deposits.
3) Diversification:
- By investing in a variety of fixed-income instruments, FMPs provide diversification while lowering the risk associated with specific securities.
4) Regular income:
- Some FMPs offer dividend choices, which provide investors with consistent income throughout the investment period.
Considerations for Investors
1) Liquidity:
- FMPs are less liquid than open-ended funds. Investors can only exit the fund through the stock exchange where it is listed, and this may be at a discount to NAV.
2) Credit Risk:
- FMP results are dependent on the credit quality of the underlying securities. There is a risk of default if any of the securities fails to meet their commitments.
- While the returns are largely predictable, they can be influenced by changes in interest rates, particularly if the portfolio contains securities with various coupon rates.
Conclusion:
Fixed Maturity Plans provide a compromise between safety and rewards, making them an appealing investment for risk-averse individuals looking for consistent income and tax savings. Their closed-end structure and fixed tenure provide clarity on the investment horizon and rewards, but they come with drawbacks like as limited liquidity and credit risk. Before making an investment, investors should consider their financial goals, risk tolerance, and the credit quality of the FMP’s portfolio.
