The full form of FMP is Fixed Maturity Plan. As the name suggests, FMPs have a fixed maturity period, which is predetermined at the time of investment. They mainly invest in debt instruments with maturities that correspond to the scheme’s tenure.
FMPs are popular among investors who are looking for relatively low-risk investment options with a predictable return on their investment. In this article, we will explore the features, benefits, and drawbacks of FMPs in detail.
This article covers:
- Fixed Maturity Plan Meaning
- Features of Fixed Maturity Plan
- Advantages of Fixed Maturity Plan
- Disadvantages of Fixed Maturity Plan
- Tax On FMP – Fixed Maturity Plan
- Best Fixed Maturity Plans
- Fixed Maturity Plan- Quick Summary
- Fixed Maturity Plan- FAQ
Fixed Maturity Plan Meaning
A Fixed Maturity Plan (FMP) is a type of closed-ended debt mutual fund that invests in debt instruments with a fixed maturity period, typically ranging from one month to five years.
Unlike open-ended debt funds, FMPs have a fixed investment tenure and cannot be redeemed before maturity. FMPs invest in a portfolio of debt instruments, including commercial papers, certificates of deposit, and corporate bonds, with a similar maturity period as the FMP.
FMPs are typically offered by mutual fund companies, and their minimum investment amount varies from one fund to another. Investors can invest in FMPs through the lump sum or systematic investment plan (SIP) route. FMPs are a popular investment option among risk-averse investors who are looking for higher returns than traditional fixed deposit schemes.
Features of Fixed Maturity Plan
The following are the features of a Fixed Maturity Plan:
1. Specified Timeframe
FMPs have a specified timeframe, ranging from one month to five years, depending on the scheme. For example, if an investor invests in an FMP with a tenure of three years, the investor is guaranteed to receive their principal investment along with the returns after three years.
This fixed tenure provides investors with a clear understanding of their investment horizon and helps them plan their investments better.
2. Closed-end Investments
FMPs are closed-ended investments, which means that investors cannot redeem their investment before the maturity date. This provides the fund manager with a predictable investment horizon, allowing them to invest in debt securities with a longer maturity period.
For instance, if a fund manager expects interest rates to fall over the next three years, they may invest in debt securities that mature after three years to lock in the higher interest rate.
3. Investment Methodology
FMPs invest in a diversified portfolio of debt securities such as commercial papers, certificates of deposits, and corporate bonds. FMPs also have a fixed income stream, which provides the fund manager with the flexibility to invest in debt securities with a longer maturity period.
FMPs may also invest in debt securities with a credit rating below investment grade to generate higher returns, subject to the limits set by SEBI.
4. Interest Rate
FMP returns are sensitive to changes in interest rates. If interest rates rise, the returns on FMPs may decline, and vice versa. FMPs may also invest in debt securities with floating interest rates to protect the returns of the investors against interest rate risk.
FMPs invest in debt securities issued by companies, and these securities are subject to credit risk. FMPs may invest in debt securities with different credit ratings, ranging from AAA to below investment grade. FMPs with higher credit quality are less risky but offer lower returns, while those with lower credit quality may offer higher returns but are riskier.
6. Tax Consequences
FMPs offer tax efficiency to investors, especially for those in the higher tax brackets. If an FMP is held for more than three years, the returns are treated as long-term capital gains and are taxed at 20% after indexation.
However, if the FMP is held for less than three years, the returns are treated as short-term capital gains and are taxed as per the investor’s income tax slab.
7. Portfolio Optimization
FMPs invest in a diversified portfolio of debt securities to balance the credit risk and interest rate risk. The fund manager aims to generate stable returns by investing in a combination of high-quality and lower-rated debt securities. This helps to reduce the overall risk of the portfolio and provides investors with stable returns.
Advantages of Fixed Maturity Plan
Here are the advantages of a Fixed Maturity Plan:
1. Risk Avoidance
FMPs are considered to be a low-risk investment option compared to other mutual funds. The fixed tenure of FMPs reduces the interest rate risk, while the investment in high-quality debt securities reduces the credit risk.
Moreover, FMPs have a fixed income stream, which provides stable returns to the investors, and reduces the overall risk of the portfolio.
FMPs offer stability to investors, as they have a fixed maturity period and a predictable income stream. This makes FMPs an ideal investment option for investors who are risk-averse and want stable returns on their investments.
Moreover, the closed-ended nature of FMPs provides the fund manager with a predictable investment horizon, which helps in managing the portfolio more efficiently.
3. Tax Minimization
FMPs offer tax efficiency to investors, especially for those in the higher tax brackets. If an FMP is held for more than three years, the returns are treated as long-term capital gains and are taxed at 20% after indexation. This provides significant tax savings to investors compared to other debt-oriented mutual funds.
4. Better Yields
FMPs have the potential to offer higher returns than traditional fixed deposits, depending on the investment strategy and market conditions. For instance, if the interest rates are expected to rise over the next few years, FMPs may invest in debt securities with longer maturity periods to lock in the higher interest rate.
5. Variety Investing
FMPs invest in a diversified portfolio of debt securities, which reduces the overall risk of the portfolio. The fund manager aims to balance the credit risk and interest rate risk by investing in a combination of high-quality and lower-rated debt securities. This provides investors with stable returns and reduces the risk of capital erosion.
Although FMPs are closed-ended funds, they provide liquidity to investors through listing on stock exchanges. Investors can sell their units on the stock exchange before the maturity date, subject to market conditions and liquidity. This provides investors with an exit option in case of an emergency.
Disadvantages of Fixed Maturity Plan
Here are the disadvantages of the Fixed Maturity Plan:
1. Price Risk
FMPs are subject to market risk, which means the returns on the investment can fluctuate based on the market conditions. If the interest rates rise, the value of the debt securities in the portfolio may decrease, resulting in lower returns. Moreover, if the credit risk of the underlying securities increases, the returns on the investment may decrease.
2. Lending/Credit Risk
FMPs are subject to credit risk, which means the returns on the investment can fluctuate based on the creditworthiness of the underlying securities. If the issuer of the debt security defaults, the returns on the investment may decrease, and in some cases, the principal amount may not be repaid.
3. Withdrawal Risk
Although FMPs provide liquidity to investors through listing on stock exchanges, the liquidity is subject to market conditions. If there is a sudden increase in redemptions, the fund manager may be forced to sell the securities at a discount, resulting in lower returns for investors. Moreover, if the securities in the portfolio are illiquid, it may be difficult to sell them at a fair price.
4. Specific Duration
The fixed tenure of FMPs can be a disadvantage for investors who may need access to their funds before the maturity date. Although FMPs provide liquidity through listing on stock exchanges, the liquidity is subject to market conditions and may be limited in some cases.
5. Rate Risk
Although FMPs aim to reduce interest rate risk by investing in debt securities with a fixed tenure, they may still be subject to interest rate risk. If the interest rates rise over the tenure of the FMP, the returns on the investment may decrease.
6. Lack of Flexibility
FMPs are closed-ended funds, which means investors cannot add or withdraw funds during the tenure of the investment. This can limit the flexibility of investors who may want to change their investment strategy based on market conditions.
Tax On FMP – Fixed Maturity Plan
FMPs (Fixed Maturity Plans) are debt mutual funds and the taxation depends on the holding period. If held for less than 3 years, they are taxed as per the individual’s income tax slab, while if held for more than 3 years, they are taxed at 20% with indexation benefit.. By holding onto your FMP for more than three years you will be able to receive indexation benefits and better returns than a traditional FD.
Here is a breakdown of the tax implications of FMPs:
1. Capital Gains Tax
FMPs are subject to capital gains tax, which is a tax on the profits made from the investment. The capital gains tax is calculated based on the difference between the purchase price and the selling price of the investment.
Short-term capital gains: If the FMPs are held for less than three years, the gains are taxed at the investor’s income tax slab rate.
Long-term capital gains: If the FMPs are held for more than three years, the gains are taxed at 20% with the benefit of indexation.
2. TDS on Interest
FMPs invest in debt securities, and the interest earned on these securities is subject to tax deducted at source (TDS). The TDS rate is currently 10% for resident individuals and Hindu Undivided Families (HUFs) and 20% for non-resident individuals and foreign companies.
3. Dividend Distribution Tax
FMPs may distribute dividends to investors, which are subject to Dividend Distribution Tax (DDT) at the rate of 25%, including surcharge and cess. However, FMPs may not distribute dividends, in which case the investors will not be subject to DDT.
It is important to note that the tax implications of FMPs may vary based on the investment objectives, investment amount, and the investor’s tax bracket.
For example, if an investor is in the highest tax bracket and invests in an FMP for less than three years, the capital gains tax may be higher than the tax on interest income. Therefore, the investor may choose to invest in an FMP for more than three years to take advantage of the lower tax rate for long-term capital gains.
Best Fixed Maturity Plans
Here are some of the best fixed maturity plans in India:
- ICICI Prudential Constant Maturity Gilt Fund: It is a direct plan-growth fund that has a NAV of Rs 41.08 and an expense ratio of 0.23%
- SBI Magnum Constant Maturity Fund: This growth fund has a NAV of Rs 53.72 and an expense ratio of 0.33%
- Nippon India Series 1 Interval Fund: It comes with no expense ratio and has a NAV of Rs 29.81
Note: Mutual funds are subjected to market risk, so before investing make sure you research and consult your financial advisor.
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Fixed Maturity Plan- Quick Summary
- Fixed Maturity Plans (FMPs) are close-ended debt mutual funds with a fixed investment tenure.
- FMPs are sensitive to interest rates and credit risk, which can affect returns and expose investors to potential losses.
- FMPs offer multiple advantages to the investors such as having lower risk and providing stability to investors. Moreover, investors with higher tax brackets can receive indexation as well as tax benefits.
- FMPs also come with disadvantages such as your returns will depend on the current market conditions. Except for that the liquidity for and creditworthiness of the underlying assets can also cause problems.
- FMP returns are dependent on the performance of the underlying securities and can be affected by taxes and fees.
- Investors should consider the tax implications of FMPs, including the potential for indexation benefits while choosing the best FMP based on their investment goals and risk appetite.
- The best FMPs available in the Indian market include Nippon India Series 1 Interval Fund, ICICI Prudential Constant Maturity Gilt Fund, etc.
Fixed Maturity Plan- Frequently Asked Questions
1. What are Fixed Maturity Plans?
FMP stands for Fixed Maturity Plan, which is a type of debt mutual fund where the investment is made for a fixed tenure with a predetermined rate of return.
2. Is FMP better than FD?
FMPs offer higher returns than traditional bank fixed deposits, with a lower credit risk profile. However, FMPs are subject to market risks and other risks, and investors should evaluate their investment objectives and risk appetite before investing.
3. Which is the best fixed maturity plan?
The best FMP for an investor depends on their investment objectives, risk appetite, and other factors. Popular FMP providers in India include:
- Nippon India Gilt Securities Fund
- PGIM India Short Maturity Fund
- IDFC Government Securities Fund Investment Plan
- ICICI Prudential Constant Maturity Gilt Fund
4. What are some examples of fixed maturity plans?
Some examples of FMPs in India include
- HDFC Fixed Maturity Plans
- ICICI Prudential Fixed Maturity Plans
- Reliance Fixed Horizon Fund
5. Is SBI FMP safe?
SBI FMPs are typically considered safe, as they invest in high-quality debt instruments with low credit risk. However, FMPs are subject to market risks and other risks, and investors should evaluate their investment objectives and risk appetite before investing.
6. Is FMP tax-free?
No, FMPs are not tax-free. FMPs are subject to taxation at the time of redemption, and investors should understand the tax implications of investing in an FMP. The tax treatment of FMPs depends on the investor’s holding period and other factors.
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