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What Is Fixed Maturity Plans (FMPs)

Fixed Maturity Plans (FMPs) are closed-ended debt mutual funds that invest primarily in fixed-income securities like bonds, government securities, and non-convertible debentures. These plans come with a fixed tenure, aligning the maturity of investments with the scheme’s duration. Investors can only subscribe to an FMP in mutual fund during the New Fund Offer (NFO) period and must hold their investment until maturity, ensuring predictability in returns. FMPs are often compared with fixed deposits (FDs) due to their structured investment nature, but they typically offer indexation benefits for tax efficiency. Understanding what is FMP in mutual fund can help investors make informed decisions, particularly when seeking stable returns with reduced market volatility.

Features of Fixed Maturity Plans

Fixed Maturity Plans come with distinct characteristics that set them apart from other mutual fund schemes. Below are the key features:

  • Fixed Tenure:

    The tenure of an FMP in mutual fund is predetermined and ranges from a few months to several years. Investors must remain invested for the entire duration.

  • Limited Liquidity:

    Unlike open-ended mutual funds, FMPs cannot be redeemed before maturity. However, they are listed on stock exchanges, offering a limited exit route.

  • Predictable Returns:

    Since FMPs invest in fixed-income instruments, they provide relatively stable and predictable returns compared to market-linked investments.

  • Tax Efficiency:

    Long-term investments in FMPs (held for over three years) qualify for indexation benefits, reducing tax liability on capital gains.

  • Lower Risk:

    FMPs carry lower interest rate risk compared to other debt funds, as they hold securities until maturity, minimising volatility.

  • NFO-based Investment:

    Investors can only enter an FMP at the time of launch during the New Fund Offer (NFO) period.

Pros & Cons of Fixed Maturity Plans

Fixed Maturity Plans offer several benefits but also come with certain drawbacks. Below is a comparative overview:

Pros

Cons

Predictable Returns: Since FMPs invest in fixed-income instruments held till maturity, they offer more predictable returns.

Limited Liquidity: Investors cannot redeem FMPs before maturity, making them illiquid.

Tax Benefits: Long-term FMPs qualify for indexation benefits, reducing tax liability.

No Guaranteed Returns: Unlike FDs, FMPs do not offer guaranteed returns as they depend on market interest rates.

Lower Interest Rate Risk: The buy-and-hold strategy minimises exposure to interest rate fluctuations.

NFO Restrictions: Investors can only invest in FMPs during the NFO period, unlike open-ended funds.

Diversification: FMPs invest in a mix of high-quality debt instruments, ensuring stable returns.

Market Listing Risks: While FMPs are listed on stock exchanges, liquidity remains limited and prices may fluctuate.

How Is FMP Different From Other Debt Funds?

An FMP in mutual fund differs from other debt funds in several ways:

  • Closed-ended vs Open-ended:

    Unlike regular debt funds, FMPs are closed-ended, meaning investors must stay invested until maturity.

  • Interest Rate Risk:

    Open-ended debt funds are affected by fluctuating interest rates, whereas FMPs mitigate this risk by holding securities until maturity.

  • Liquidity:

    Debt funds offer redemption flexibility, but FMPs only allow exit through stock exchanges with limited liquidity.

  • Taxation:

    Long-term FMPs enjoy indexation benefits, reducing taxable gains, unlike short-term debt funds.

Who Should Invest in FMPs?

Fixed Maturity Plans are suitable for investors looking for stable returns over a fixed tenure. They are ideal for individuals who:

  • Have a medium- to long-term investment horizon.

  • Want better tax efficiency compared to fixed deposits.

  • Seek lower risk compared to equity investments but do not require liquidity.

  • Are comfortable staying invested for the entire tenure without early withdrawals.

Tax Benefits of FMPs in Mutual Funds

Tax treatment of FMPs depends on the holding period. If an investor holds an FMP in mutual fund for less than three years, gains are classified as Short-Term Capital Gains (STCG) and taxed as per the investor’s income tax slab. However, if the investment is held for over three years, gains are considered Long-Term Capital Gains (LTCG) and taxed at 20% after indexation benefits.

Indexation reduces the taxable amount by adjusting the purchase price of units for inflation, leading to a lower effective tax rate. This makes FMPs a more tax-efficient option for long-term investors compared to fixed deposits, where interest earnings are taxed at slab rates. Understanding FMP full form in mutual fund and its taxation structure helps investors make informed decisions for tax-efficient wealth creation.

How Do Fixed Maturity Plans Differ From Fixed Deposits?

Fixed Maturity Plans (FMPs) and Fixed Deposits (FDs) are both popular fixed-income investment options, but they differ significantly in terms of returns, taxation, and liquidity. While FDs offer guaranteed returns, an FMP in mutual fund carries market-linked returns but benefits from indexation for tax efficiency. Here’s a comparison:

Criteria

Fixed Maturity Plans (FMPs)

Fixed Deposits (FDs)

Type

Mutual funds

Bank deposits

Regulatory Authority

Securities and Exchange Board of India (SEBI)

Reserve Bank of India (RBI)

Taxation

Taxed as capital gains

Taxed as income

Returns

Generally higher, but not guaranteed (e.g., 7.5% for 3 years)

Fixed and lower (e.g., 6% for 3 years)

Risk

Higher credit risk (invest in corporate bonds)

Lower credit risk (backed by the financial institution)

Insurance

Not insured

Insured up to ₹5 lakh by DICGC

Inflation Risk

Lower (higher post-tax return, e.g., 6.4% post-tax)

Higher (may lose value due to inflation, e.g., 4.8% post-tax)

Guarantee

No guarantee on returns

Guaranteed returns

Who Should Think About Investing in Fixed Maturity Plans?

Investors looking for a stable return while benefiting from better tax efficiency should consider a fixed maturity plan. It is suitable for those with a medium-term investment horizon who want to avoid interest rate volatility. If you are seeking a relatively predictable return but can remain invested for the entire tenure, an FMP in mutual fund may be a strategic choice over traditional deposits.

When Is It the Right Time to Opt for Fixed Maturity Plans?

The right time to invest in a fixed maturity plan depends on interest rate trends and market conditions. Since FMPs invest in debt securities with a fixed tenure, they work best when:

  • Interest rates are expected to remain stable or decline, ensuring better returns.

  • Investors seek a safer alternative to market-linked instruments like equity funds.

  • An individual has surplus funds that can be locked in for a fixed duration.

Key Factors to Evaluate Before Investing in Fixed Maturity Plans

Before investing in an FMP in mutual fund, consider the following:

  • Investment Horizon:

    Ensure that you can stay invested until maturity to maximise returns.

  • Tax Implications:

    Understand indexation benefits for long-term gains.

  • Credit Quality:

    Check the credit rating of the underlying securities to assess risk levels.

  • Liquidity Constraints:

    FMPs cannot be redeemed before maturity unless traded on exchanges, which may not always be liquid.

Final Thoughts

A fixed maturity plan is a structured investment designed for those seeking stability and tax efficiency. Understanding what is FMP in mutual fund and comparing it with other fixed-income instruments is crucial before investing.

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