Why is Fixed Maturity Plan often compared to FD?

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Mutual fund companies are back to launching Fixed Maturity Plans ie FMP. Fund houses have launched around 44 FMPs so far this year. Not only this, FMPs of many mutual funds are being launched in August and September, this year.

What is the reason for this?

Yields have become very attractive in the money market. There is no possibility of a fall in the interest rates as well. The same trend is expected to continue in the next year as well. Hence, fund houses want to take advantage of higher yields to attract fixed income investors.

What are FMPs?

Fixed Maturity Plan or Fixed Term Plan are basically close ended debt funds. Investment portfolio consists of assets whose maturity is roughly the same as that of the scheme. Close-ended means you can invest only at the time of NFO. And it is not possible to invest later. Once you invest, you have to keep investing money just like a fixed deposit. These differ from FDs in a way that they can be traded in the market. These invest in Certificates of Deposit, Commercial Paper, other money market products, corporate bonds, non-convertible debentures of reputed companies or government securities. The fund manager creates such a portfolio, that minimizes the risk Due to investment in debt instruments, these are less exposed to the fluctuations of the stock market.

What are the benefits?

Like FD, investment in FMPs is also considered very safe. Being a debt product, the volatility is less.

What are the limits?

This investment may not work for you in emergency. Although there is a way out of this because these are allowed to be sold on stock exchanges. But, in the secondary market, FMP is very il-liquid which means there are fewer buyers. You may have to sell it at a discount. Returns on Fixed Maturity Plans are lower than Equity Funds. The returns are almost fixed and there is no benefit of any boom in the stock market.

How much return do you get?

In FMP, the returns are almost fixed. You get an estimate or an idea of it because the fund house gives you complete information in NFO regarding in which securities your money will be invested and how much return is expected there in three or five years. Although, unlike FD, there is no guarantee of return. Only an estimate can be made. If we talk about the last one year… then the returns of the flagship FMPs have been 6.07 to 7.24 percent.

Who should invest?

Many experts say that if you want more returns then you should invest in an open-ended mutual fund If you have a short-term target, then, go for a low duration fund and short term fund. If you have accumulated money, which is not to be spent for the next three-four years, then you can invest it in any FMP, whose maturity matches your target.

By the way, FMP period can be between 3 months and 5 years. Before April 2023, FMPs were considered better than FDs in terms of tax because they used to get the benefit of indexation but now they do not even get this benefit.

Certified Financial Planner Jitendra Solanki says that due to the change in tax norms on debt funds, FMPs are no longer attractive. These have become like FDs. That’s why only if you expect to get one-and-a-half percent more return than FD in an FMP, then, you should invest.

Overall it can be said that even though FMPs are being launched enthusiastically, but, before getting trapped, you should think carefully. These are right for those investors, who want returns like bank FDs. If you are looking for an alternative to FD and want to take less risk, then, you can invest in FMP.