Understanding FMP and its benefits

Fixed Maturity Plans, or FMPs as they are called in their abbreviated form, are essentially close-ended debt schemes which make investments for a certain period of time and come with a low risk profile. Debt instruments such as National Savings Certificates, bonds, Fixed Deposits, etc., are the most common investment avenues chosen by those who seek exposure to debt in their portfolio. However, most investors are unaware of the fact that there are better tax-efficient investment options out there. Given that the income earned through the aforementioned instruments is fully taxable (apart from Provident Fund and Public Provident Fund), the total returns earned after tax are usually too low to even beat inflation.

Fixed Maturity Plans make investments only in those instruments that have a duration similar to their own. For instance, a 1110-day Fixed Maturity Plan will make investments in instruments whose maturity period ends in 1110 days or less. Fixed Maturity Plans are ideal investment avenues for those who wish to accrue stable returns through a debt investment.

Objectives of Fixed Maturity Plans

FMPs primarily aim to generate stable returns for a fixed timeframe. They offer protection from market fluctuations to investors. They cannot be subscribed for on a regular basis, and can only be purchased during the NFO period. NFOs have an opening date when units of FMPs become available for purchase to investors, and a closing date after which investors can no longer purchase units of the FMP.

Who are Fixed Maturity Plans for?

Long-term Fixed Maturity Plans whose maturity periods are at least 36 months are great investment options for those who seek the following:

• Capital protection
• Minimal exposure to market risk
• Benefit of double indexation
• A vehicle to park their money for long-term goals
• Steady returns on investment

Composition of an FMP Portfolio

A Fixed Maturity Plan makes investments in the following debt securities:

• Government/corporate bonds
• Non-convertible debentures
• Commercial Papers
• Treasury Bills
• Certificates of Deposits
• Other money market instruments such as Bank Fixed Deposits

Returns Generated by a Fixed Maturity Plan v/s Returns Generated by a Bank Fixed Deposit

Here is an illustration that compares investment in a Fixed Maturity Plan with investment in a Bank Fixed Deposit:

*The Cost Inflation Index for 2012-13 (the year of investment) is 852, and the Cost of Inflation for 2015-16 (the year of redemption) is 1081. The indexed cost is basically the investment amount divided by the Cost Inflation Index of the year of investment, multiplied by the Cost Inflation Index of the year of redemption.

**The tax rate for FMPs is the tax rate applicable to long-term debt assets (inclusive of surcharge and cess); and tax rate for FDs is taken as per the highest bracket of tax slabs.

Points to Remember Before Choosing a Fixed Maturity Plan

It is crucial to understand where the Fixed Maturity Plan makes investments as the credit risk of the plan will be determined by the quality of its portfolio. Make sure that you carefully go through the Scheme Information Document to check the past performance of the Fixed Maturity Plan of the fund house. Although the past performance of the FMPs offered by a fund house does not predict or forecast its future results, you will have a better idea regarding the fund manager and what you can expect.

Are there any Drawbacks to Investing in Fixed Maturity Plans?

One of the few drawbacks of Fixed Maturity Plans is that you cannot redeem them prior to the maturity date. If you wish to redeem these plans before they attain maturity, their units will have to be sold on the stock exchange.

Fixed Maturity Plans v/s Fixed Deposits

Fixed maturity plans are often confused with fixed deposits. The only major common thing between the two is the lock-in period. Apart from that, FMPs are basically debt funds which make investments in government securities and debt instruments of companies. Here are the major features of fixed maturity plans and fixed deposits.

Features of a Fixed Maturity Plan

• Tenure is fixed: When investing in an FMP, investors have the option to select a plan in keeping with their cash flow requirements as well as the investment horizon they desire. Investors will be aware of how much returns they can expect during the NFO stage when investing in FMPs.
• Investment strategy: Investment in FMPs could be through certificates of deposits, money market instruments, commercial papers, government securities, corporate bonds, etc. The maturity period of these instruments will be pretty much the same as the scheme’s tenure.
• Closed-ended funds: Investment in FMPs can only be done during the scheme’s initial offer period. Investors will only be allowed to redeem units of the scheme once the scheme has matured. However, those who hold units of FMPs can sell them on stock exchanges to exit the scheme before it attains maturity.
• Interest rate: Considering the rate of returns associated with FMPs are fixed, they are hardly exposed to interest rate-related risks. The fund holds the instruments until they mature, and investors know beforehand how much returns they can expect.
• Balanced portfolio: FMPs provide stable returns during the tenure of the scheme. They serve as asset management tools which enable the scheme to use a wide base to locate investors.
• Tax implications: One of the main reasons why FMPs are preferred over FDs is the taxation area. If you choose an FMP with a long maturity period (over a year), you can make the most of indexation benefits and thereby leverage your tax liability against inflation.
• Credit risk: Considering that FMPs invest primarily in highly-rated credit instruments, there is minimal risk of low credit. There is also very low risk of liquidity with FMPs.

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