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What are Fixed Maturity Plans? All you need to know
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:
Advantages of Fixed Maturity Plans
There are multiple benefits that are associated with investing in Fixed Maturity Plans
Disadvantages of Fixed Maturity Plans
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 our Expert advisor to get the right plan