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What is fixed maturity plan mutual funds
Fixed Maturity Plans (FMPs) are popular among investors at the end of the financial year as they get the benefit of triple indexation, thereby reducing their tax liability.
1. What are fixed maturity plans?
FMPs are closeended debt funds with a maturity period which could range from one month to five years. Because debt funds enjoy long term capital gains tax after three years, typically threeyear FMPs are now popular. FMPs are predominantly debt-oriented, and their objective is to provide steady returns over a fixed-maturity period, thereby protecting investors from market fluctuations.
2. What are the benefits of FMPs?
Capital Protection and No Interest Rate Volatility: Since they invest in debt instruments, FMPs provide low risk of capital loss as compared to equity funds. As the securities are held till maturity, FMPs are not affected by interest rate volatility. Taxation Benefit: FMPs offer better post-tax returns than FDs as well as liquid and ultra shortterm debt funds because they offer indexation benefits. Indexation helps to lower capital gains and thus lower the tax.
Triple indexation allows an investor to take advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years. Lower Expense Ratio: Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments, thereby resulting in a lower expense ratio for investors.
3. Where do FMPs invest?
FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like 'AAA' rated corporate bonds) over a defined investment tenure. Sometimes they also invest in bank fixed deposits. They do not invest in equities.
4. How do FMPs work?
An FMP portfolio consists of various fixed income instruments with matching maturities. Based on the tenure of the FMP, a fund manager invests in instruments in such a way, that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan.
5. Are FMPs liquid?
Since FMPs are close end funds, they can only be traded on the stock exchange, where they are listed. However, trading in these units is negligible which makes FMPs illiquid. Compared to this, open end debt funds which can be bought or sold on a daily basis.