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Fixed Maturity Plans: A Detailed Guide on Fixed Maturity Plans (FMP)

An increasing number of people in India are selecting FMPs over bank FDs. Check out this post to know what they are and how they work.

Getting Started with Fixed Maturity Plan

Fixed Deposits (FDs) have long been a go-to investment option in India. Investors here are known to be highly risk-averse, and the guaranteed returns offered by FDs perfectly meets their risk profile.

However, an increasing number of investors, especially new-age investors, are investing in Fixed Maturity Plans (FMPs). So, what are these plans? How do they work? Should you consider investing in them over bank FDs? Know more

What are FMPs?

As the name suggests, FMPs are a type of debt mutual fund that has a fixed maturity, ranging from one month to five years. These are close-ended funds where the investor is only allowed to invest during the NFO (New Fund Offer) and redeem the same on maturity. While technically these funds are also listed on stock exchanges, the liquidity is generally very low. It also means that once the NFO of an FMP is over, you cannot purchase any more units.

Where Do FMPs Invest Your Money?

FMPs invest in debt-based fixed maturity instruments like corporate bonds, money market instruments, bank FDs, CPs (Commercial Papers), or CDs (Certificate of Deposits). So, for instance, if the maturity of an FMP is 3-years, it will invest in maybe CPs that have a 3-year maturity. Unlike other types of debt funds where the fund managers continuously adjust the portfolio, Fixed Maturity Plans require zero to minimum adjustments once the money is invested.

Do FMPs Offer Guaranteed Returns?

No, unlike bank FDs where you receive the exact returns mentioned on your FD certificate, the returns from FMP in mutual fund are indicative.

The fund house only mentions indicative returns at the time of NFO. But the returns can be higher or lower at the time of maturity. In most cases, there is only a minor difference in the indicative and actual returns of FMPs.

So, if FMPs do not provide guaranteed returns, why do people consider them over bank FDs? One of the biggest reasons is taxation.

Taxation of FMPs

With bank FDs, the interest income is taxed as per your income tax slab. So, someone in the 30% tax slab will have to pay 30% taxes on their FD income. This makes FDs a guaranteed but not a tax-efficient investment option.

As FMPs are a type of debt fund, they are taxed like other debt funds. Investments held for more than 36-months are taxed at the rate of 20%. But there is an indexation benefit available here. With indexation, you get to increase the purchase price of FMP units in accordance with the inflation during the period. This helps in reducing your taxable returns from FMPs.

It is due to this reason that FMPs with a maturity of 3-years and above are currently very popular. But in case if you select an FMP with a maturity of less than 36-months, the returns will be added to your taxable income and taxed as per the tax slab just like bank FDs.

Top Benefits of Investing in FMPs

Now that you know what is FMP let us have a look at some of their top advantages-

  • Highly Tax-Efficient After 3-Years-

    As discussed above, the indexation benefit makes FMPs a highly tax-efficient investment option. But indexation is only available for investments held for more than 3-years.

  • Low Expense Ratio-

    As discussed above, the indexation benefit makes FMPs a highly tax-efficient investment option. But indexation is only available for investments held for more than 3-years.

  • Minimum Risk-

    While FMPs are not risk-free, the risk level is minimum, especially when compared to something like equity mutual funds. Also, as the same instrument is held until maturity, interest volatility too is negligible.

Who Should Invest in Fixed Maturity Plans?

As compared to bank FDs, FMPs are historically known to deliver higher returns. But note that unlike FDs, the returns from FMPs are not guaranteed.

But they are still an excellent option for anyone looking to park their surplus income for a fixed tenure of 1-month to 5-years and earn higher returns than FDs. Even long-term risk-averse investors who are not comfortable with the fluctuations and volatility of equity funds can consider investing in one of the top FMPs.

But before investing, do remember that FMPs are close-ended schemes, and you will mostly not be able to redeem your investment before maturity.