Fixed Maturity Plans (FMPs) are becoming scarce. In these close-ended plans, you could invest as much money as you wanted and get it back after a certain period. But, the 2014 budget changed the definition of LTCG in FMPs from one year to three years. Now, the minimum maturity period is longer. However, these schemes are still available if you want to invest.
Very few people know about fixed maturity schemes. This article gives an overview of fixed maturity plans and everything you need to know about investing in one.
What are FMPs?
A Fixed Maturity Plan (FMP) is a closed-ended debt-based mutual fund. That is, you invest in a fixed-term joint debt fund. This fund invests in fixed-income securities with maturities matching the fund’s maturity.
For example, suppose an FMP has a term of three years. In that case, the fund manager will invest in securities with maturities of three years or less. They fall no later than the FMP’s maturity date. These securities can include:
- Certificates of deposit
- Commercial papers
- Treasury bills
- Corporate bonds
- Government securities
- State development loans
You will only receive your money after the plan matures. Therefore, if you invest in a 5-year fixed maturity plan, you will get your money only after five years.
How do fixed maturity plans work?
Fixed maturity plans aim to reduce interest rate risk. When you own debt securities, you must be cautious. Any increase in interest rates may decrease the value of the securities.
However, because fixed maturity plans are closed-ended, investments are often held until maturity. Hence, yields are locked at the time of investing. Therefore, portfolio yield is maintained. It also protects the amount from fluctuations in interest rates during the scheme’s term. Therefore, fixed maturity plans are safer investment options.
What are the features of fixed maturity plans?
1. They are close-ended.
Fixed maturity plans, as previously indicated, are only redeemable after the maturity term. This is invalid only if they are traded on a stock exchange. Fixed maturity plans can have tenures of a few months to a few years.
2. They give predictable returns.
Fixed maturity plans invest in fixed-income instruments. An FMP’s maturity date is directly related to the maturity period of these instruments. As a result, fixed maturity plans can provide a relatively set rate of return upon maturity. You also know your expected returns (on maturity) at the NFO (New Fund Offer) stage.
Therefore, if you are searching for investments with predictable returns at maturity, FMPs may be a good choice.
3. They have a lower risk profile.
Fixed maturity plans have a lower exposure to interest rate risk due to their highly predictable returns. Furthermore, these funds typically invest in high-quality assets. It can reduce the possibility of a default or credit risk.
4. You get the advantages of indexation.
Let’s look at an example of how indexation might help an FMP in a mutual fund.
Consider this: you invested in an FMP before March 31, 2021, and its term is slightly longer than four years, or 1095 days. Your plan will be completed sometime after April 1, 2024.
In this situation, you will keep your investment for four financial years rather than three. In this case, you can claim four-year indexation advantages, reducing your tax bill.
What are the benefits of fixed maturity plans?
1. They have minimal interest rate risk.
FMPs are least vulnerable to interest rate risk. This is because the fund manager usually holds the instruments until maturity. FMPs often invest in assets with better credit quality to reduce credit risks. They also help to avoid liquidity risks.
2. They are low-cost.
In fixed-maturity plans, investments are made in line with the maturity of the fund. Hence, there is no constant buying or selling of securities in the scheme. This lowers the scheme’s costs.
3. Low tax is charged.
Investments in an FMP made after a fixed time allow an investor to use annual inflation benefits. This can lower taxes on their gains.
Should you invest in fixed maturity plans?
Fixed maturity plans are a useful tool for investors who want predictable returns. Your investment is locked for a specific period. This is suitable for investors looking to achieve various short-term or long-term goals. The goals align with the maturity profile of the invested FMP. It will be useful if they want certainty in the returns.
They provide a relatively stable investment alternative. They also broaden the portfolio of your debt mutual funds. This gives them a due advantage.
When should I invest in FMPs?
According to mutual fund specialists, rising economic interest rates are driving demand for FMPs. Since January 2022, interest rates have increased. The increasing rate environment is a favourable moment for fixed maturity plans.
As a result, AMCs firms are rushing to launch new FMPs. This comes after the industry virtually wrote off FMPs during the 2018-2019 financial crisis. To avoid defaults, several FMPs had to extend their maturity dates.
Mutual fund experts believe that FMPs are better positioned now when long-term debt funds are experiencing negative returns. According to them, many investors sell their plans after experiencing unsatisfactory outcomes over some time. During such circumstances, FMPs might be beneficial to mutual fund firms. However, few people need it.
When investing in an FMP, it is important to be cautious about a few factors. One of them is the credit rating of FMPs. Before investing, you should review the fund’s rating profile. Your objectives are also important. You should see whether your investment objectives align with the terms of the FMP.
You might have to wait until maturity to redeem these investments. You may seek financial advice from a professional financial advisor before investing. You can consult help from financial experts like Piramal Finances.