What comes to your mind when you think of terms, such as ‘fixed’ and ‘maturity’? If you are thinking of debt investment, you are correct.
But what exactly can be a fixed maturity plan?
A Fixed Maturity Plan (FMP) is a kind of debt-based mutual fund which is closed-ended in nature. Meaning, you invest in a debt mutual fund with a fixed tenure.
What comes to your mind when you think of terms, such as ‘fixed’ and ‘maturity’? If you are thinking of debt investment, you are correct.
But what exactly can be a fixed maturity plan?
A Fixed Maturity Plan (FMP) is a kind of debt-based mutual fund which is closed-ended in nature. Meaning, you invest in a debt mutual fund with a fixed tenure. This fund invests majorly in fixed income instruments whose maturity period is in sync with the maturity of the fund.
Features of Investing in an FMP
Closed-ended
As discussed above, FMPs being closed-ended are redeemable only after the maturity period, except through the stock exchange.
Predictable Returns
FMPs invest in fixed income instruments like Commercial Papers (CP), Corporate Bonds, Certificate of Deposits (CD), Non-Convertible Debentures (NCDs) of reputed and high rated businesses, G-secs, money market instruments and more.
The maturity date of an FMP is closely aligned with the maturity period of these instruments. Therefore, FMPs can yield a relatively fixed rate of return on maturity. Also, you get to know your approximate returns (on maturity), in advance, at the NFO (New Fund Offer) stage itself.
Therefore, if you are looking for investments with relatively predictable returns on maturity, FMPs can be a suitable option.
Lower Risk Profile
Looking at the nearly predictable returns offered by the FMPs, it can be said that they have a lesser exposure to interest rate risk. Also, these funds generally invest in high rated instruments. This can lower the risk of default or credit risk.
Indexation Benefits
Let’s understand indexation benefit in an FMP with an example:
Consider, you invested in an FMP before March 31, 2021, and its tenure is slightly longer than four years or 1095 days. Your plan would mature somewhere after April 1, 2024.
In this case, you are holding your investment for four financial years instead of three. In this condition, you can claim indexation benefits for four years, which can effectively reduce your tax liability.
Can Help in Portfolio Balancing
Having an FMP in your portfolio can help you add stability and balance the market risk for an equity-heavy portfolio. Therefore an FMP can be a suitable asset allocation tool for portfolio balancing.
Along with the benefits, there are a few things you should be careful about while investing in an FMP. One of them is the credit rating of FMPs by reputed rating agencies. It is essential to check the rating profile of the fund before investing.
Another important aspect is your goals. Considering the redeemability factor of FMPs, it would be better to align our investment goals with maturity.
This is because you might have to wait till maturity to redeem these investments. You may seek financial advice from a professional financial advisor for the same before investing.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.