What are Fixed Maturity Plans? Characteristics of maturity plan
Many investors, especially those who are just starting their investment journey, are on the lookout for low-risk instruments that provide consistent returns.
For individuals who are risk-averse, Fixed Maturity Plans (FMPs) might be an option worth considering.
FMPs are close-ended debt funds that are investible for pre-defined lock-in periods. The tenure for different Fixed Maturity Plans can vary based on the time horizon for which the investment is made, ranging from 30 days to 5 years.
To invest in FMPs, the way to go is through NFOs (New fund offers) or via companies that provide asset management services, making their investment at NFO.
Fixed Maturity Plans mainly consist of debt instruments like treasury bills, corporate and government bonds, commercial papers, non-convertible debentures, securitized debt instruments, and certificates of deposit.
The main purpose of this plan is to shield investors from interest-rate fluctuations and provide consistent returns. Moreover, FMPs are known for offering better returns than bank fixed deposits (FDs).
Characteristics of Fixed Maturity Plans
The silent features of Fixed Maturity Plans are as follows:
- Close-ended scheme: The schemes are close-ended because individuals can invest in these plans only by subscribing to NFOs where a given number of Net Asset Value (NAV) units are issued against the funds. These NAV units are tradeable in the stock market like any other script/share.
- Portfolio composition: Fixed Maturity Plans are curated to alleviate the effects of stock market volatility and the interest rate risk on the portfolio. This is possible mainly in the case of debt securities.
- Interest-rate sensitivity: FMPs are less susceptible to interest-rate fluctuations because extended maturity periods stabilize interest rates in the long run.
- Quality of assets: The debt instruments issued by big and reputable companies play a significant role. Given their command in the market, these companies can offer good returns on their tools. Besides, fund managers and portfolio managers also have the incentive to choose from the available investments to maximize the returns on FMPs.
- Lock-in period: Fund withdrawal during the tenure of the investment scheme is not possible. Apart from this, investments in Fixed Maturity Plans are made only once, i.e., a flat sum. The main aim of such rules and regulations is to ensure ample time for the returns to exhibit the magic of compounding.
Advantages of fixed maturity plans
There are multiple benefits that are associated with investing in Fixed Maturity Plans
- Lower-risk: The risk associated with FMPs is considered to be lower than several other investment options. The investment is deemed secure because FMPs primarily target the debt securities that well-known listed companies issue in the market. FMPs are backed by high ratings given by renowned credit rating institutions. Investment in highly rated instruments also reduces the risk of default. These plans provide a balance to investors by protecting their capital and acting as defensive investments.
- Stability: Due to less exposure to equity volatility and lower interest rate risk, these funds fluctuate less than the markets. These plans become attractive to investors in recessionary times because of the safety of capital and the returns offered under the circumstances.
Disadvantages of Fixed Maturity plans
- Lower yields: By now, we all know that higher rewards are linked with higher risks. The returns on these plans are lower than the equity benchmarks as the rate of interest stays the same for the entire timeframe of the investment.
- Less liquidity: The lock-in period of FMPs means that the investments cannot be withdrawn before maturity. This lack of liquidity might prove to be an inconvenience for some investors.
Tax liabilities on FMPs
FMPs attract STCG (Short Term Capital Gains) or LTCG (Long Term Capital Gains) tax depending upon the time horizon of the investment.
Any investment in FMP is short-term if the lock-in is less than three years and investors are liable to pay STCG based on the income tax slab they belong to.
Returns on investments with a lock-in period of more than three years attract LTCG at 20% after indexation adjustments. Indexation incorporates rising prices in the economy, thereby resulting in tax benefits for the investors.
Other than the taxes on the appreciated value of the investments, the FMPs with dividend options also require investors to bear the DDT (Dividend Distribution Tax) on the dividends that they receive during their investment.
Who should consider investing in FMPs?
Every investment option has some characteristic that makes it suitable for particular groups of people. In the case of FMPs, their low-risk feature makes them ideal for investors who are unwilling to take risks associated with the stock market.
The comparatively stable returns and capital protection give the investors a sense of comfort. Additionally, the total returns are usually known beforehand because the interest rates of the underlying funds are known at the time of issuance itself. The security of these returns also allows investors to plan financially for these investments.
Those who are highly risk-averse often put their entire capital into FMPs, whereas the investors looking for portfolio diversification allot a certain percentage of their capital to such funds. FMPs work well for those looking to mitigate the risk without compromising too much on the returns.
Consult an expert advisor to get the right plan
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