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    Fixed Maturity Plans (FMP) - Meaning, Features, Benefits, Taxation

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    Fixed Maturity Plans (FMPs)

    Feb 19, 2024
    5 min | Views 254

    A fixed investment tenure is one of the most common prerequisites among conservative investors. Fixed Maturity Plans (FMPs) effectively fulfill this expectation. Read this post to know more.

    One of the reasons for the growing popularity of mutual funds in India is the availability of a wide range of mutual fund schemes. For instance, if you’re a conservative investor looking for a scheme with a fixed investment tenure, an FMP or Fixed Maturity Plan is worth considering.

    FMPs are debt-based mutual fund schemes with a fixed lock-in and stable returns. Here are 5 things investors should know about FMPs before investing-

    1. What is a Fixed Maturity Plan (FMP)?

    A Fixed Maturity Plan (FMP) is a close-ended debt fund with a predetermined maturity date that primarily invest in debt-based securities, such as treasury bills, corporate debt securities, certificates of deposits, etc., whose maturities match the lock-in tenure of the scheme.

    The investing window for FMPs is only open for a short duration during the NFO (New Fund Offer), after which no new investor can purchase the fund units from the AMC. However, as per SEBI provisions, close-ended schemes like FMPs should be mandatorily listed on stock exchanges to provide investors with an early exit if required.

    2. What are the Features of Fixed Maturity Plans?

    FMP in mutual fund is characterized by features like-

    • Fixed Lock-in Period

      FMPs come with a fixed lock-in period ranging from a few months to years, making them an ideal choice for conservative investors who only want to invest for a fixed duration.

      This lock-in period, preventing redemption before maturity, provides FMPs the potential to deliver better returns than other types of debt funds, such as ultra short-term and liquid funds.

    • Stable Returns

      Fixed Maturity Plans (FMPs) only invest in fixed income-generating instruments, like certificates of deposit and corporate debt securities, high-quality money market instruments, and government securities.

      And as the investment tenure is fixed, they deliver stable returns. In fact, the expected returns are declared by the AMC during the NFO.

    • Low Level of Risk

      As investments are made in securities whose maturities align with that of the lock-in period of the scheme, FMPs are not prone to interest rate risk.

      Also, as the investments are generally made in high-quality instruments, the default risk is minimal too. While all mutual funds are subject to risks, FMPs come with a minimal level of risk.

    3. What are the Benefits of Investing in Fixed Maturity Plans?

    Here are some of the reasons why investors add FMPs to their portfolios-

    • Portfolio Stability

      Traditional investment options are popular in India due to their fixed investment tenure and returns.

      FMPs come with similar features, wherein the investment tenure is pre-fixed, and returns are stable. Such schemes are often used by investors to reduce portfolio volatility.

    • Lower Costs

      As discussed, FMPs invest in debt-based schemes for a fixed duration, aligning with the scheme maturity. As a result, there is no active buying and selling of securities. As fund managers don’t have to actively seek investment opportunities and make buying/selling transactions, Fixed Maturity Plans have lower expense ratios.

    • Indexation Benefit

      Investments in debt mutual funds like FMPs redeemed after 3 years from the date of investment are subject to 20% LTCG (Long-Term Capital Gains) tax but with the indexation benefit.

      This benefit allows investors to adjust the purchase NAV of the fund according to the inflation level in the country. The indexation benefit can reduce your tax liability.

    4. Who Should Invest in Fixed Maturity Plans?

    Mutual funds like equity funds have the potential to deliver higher returns, but they come with a higher level of risk. Market volatility can significantly impact scheme performance, especially in the short term. Several investors prefer to avoid this high level of risk and volatility. Such conservative investors can invest in FMPs.

    With a fixed tenure, and investments in high-quality debt-based securities, FMPs carry minimal risk. Moreover, these schemes can also be considered to add more diversity to an investment portfolio. For instance, if most of the portfolio comprises equity and equity-based mutual funds, debt funds like FMPs can be added to minimize volatility.

    5. How are Fixed Maturity Plans Taxed?

    For tax purposes, FMPs are treated as debt mutual funds. STCG (Short-Term Capital Gains) or gains generated by redeeming the investment within 3 years from the date of investing are added to the overall income of the investor and are taxed as per their tax slab.

    LTCG (Long-Term Capital Gains) tax of 20% with indexation is applicable on FMP investments redeemed after 3 years of investing. Dividends, if any, generated by the scheme are also added to the investor's taxable income and taxed as per their tax slab.

    Enhance Portfolio Stability with Fixed Maturity Plans (FMPs)

    FMPs can be excellent investments for conservative investors who want to invest for a fixed duration and earn stable returns . But as with any investment, due diligence is crucial, and investors should select FMPs as per their financial goals and risk preferences.

    If you’re confused with all the different types of mutual fund schemes, a professional financial advisor can help.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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