Are you looking to diversify your portfolio? Consider fixed maturity plans. These are a type of mutual funds popular among investors who do not like high-risk investment options.
A fixed maturity plan commonly called an “FMP,” is a closed-ended debt mutual fund. It gets paid off at the end of a fixed period. They are a great investment option for investors who are looking for quick profits and do not want to take a risk with their money. Fixed maturity plans provide better returns compared to bank fixed deposits.
Investments in fixed maturity plans can be made at the time of the rollout of the new fund offer (NFO) itself. These are closed-ended funds. So you can not invest money in them once the NFO period closes. You get both your principal and the interest back upon maturity.
As we mentioned before, fixed maturity plans are preferred by risk-averse investors. Remember that they are not risk-free. We will learn more about this in the next section.
How does a fixed maturity plan work?
At the core, they are mutual funds and work like a mutual fund itself. Each maturity plan has a net asset value or NAV. When you invest money in an FMP, your money is invested by the fund’s portfolio manager into a variety of fixed-income instruments with varying maturity dates.
The fixed maturity plan itself has a maturity date. So the fund manager chooses instruments whose maturity dates match those of the FMP.
Your money is invested in various fixed-income instruments. So you will be given an indicative return while investing in the FMP. However, remember that this return is indicative only and not fixed. Hence, you can get lower returns but higher ones as well.
Fixed maturity plans to invest in debt instruments. So they are affected by economic events, interest rate fluctuations, and other factors that affect the debt market.
However, the beauty of FMPs is that they can offer you higher returns than traditional debt instruments. They don’t take unnecessary risks.
Who should invest in a fixed maturity plan?
These instruments are ideal for individuals with a low-risk profile or looking for secure investment options with lower fluctuations compared to the stock market. If you are a stock market investor, fixed maturity plans can be an effective tool for you to mitigate the risk of your stock market investments.
Features of a fixed maturity plan
A fixed maturity plan comes with a definite completion period. This means that your investment will remain locked in until the time of maturity. The most common lock-in period is 3 years.
Returns can be predicted
A maturity plan invests in fixed-income instruments. These are corporate bonds, certificates of deposit, commercial papers, highly rated non-convertible debentures, government securities, and different kinds of money market instruments.
Each of these has either fixed or tentative maturity dates and yields. Hence, you can get an idea of your approximate returns in advance. This is communicated during the new fund offer stage. Hence, it is possible to more or less predict the returns from an FMP.
Diversification of a portfolio
Whether you are a high-risk investor or have a low-risk profile, a fixed maturity plan can be a great addition to your portfolio. The overall outlook of this portfolio is to keep the risk profile low. So they can help you with diversification by reducing the overall risk of your portfolio.
Benefits of investing in a fixed maturity plan
From a taxation perspective, fixed maturity plans are treated similarly to debt mutual funds. If you hold an FMP for less than 3 years, you have to pay taxes on short-term capital gains as per your income tax slab rate. If you hold it for more than three years, you will have to pay long-term capital gains at the rate of 20% on the total returns.
Debt market instruments are generally less affected by stock market fluctuations. This benefit flows into maturity plans as well. Your money is locked for a specific duration in an FMP. So the fund manager has more freedom to move the money from one debt instrument to another to maximise returns for you.
A fixed maturity plan is not risk-free. It has less risk as compared to mutual funds and other forms of investment planning. The main drawback is that your money gets locked in until maturity. But then, that’s the case with all other debt instruments as well.
Constraints of fixed maturity plans
If you compare the yield of fixed-maturity plans with equity mutual funds, the earnings are lower. Moreover, fixed maturity plans do not benefit from cyclical movements of the stock market. However, they do benefit from other factors such as interest rate fluctuations and economic cycles.
Lock in period
As we mentioned at the beginning itself, your money will be locked in once you invest in a fixed-maturity plan. This can be a hindrance if you need the money in between.
You might face a dilemma in your life when you have to decide whether you should invest your money in a fixed maturity plan or a fixed deposit. Well, you are not alone. Thousands of people face the same kind of situation in India.
The best way to resolve this confusion is to ask yourself whether you are willing to take a little amount of risk to give yourself the chance to earn some additional returns. If yes, this instrument is meant for you.
Communication of the expected return at the time of investing itself provides peace of mind. Furthermore, estimating total earnings from the start aids in accurate financial planning.
Visit Piramal Finance for further details.