What is a fixed maturity plan? Who should opt for it?

Fixed maturity plans or FMPs are closed-ended debt funds that invest in debt instruments until the stated maturity period. The maturity periods of FMPs are pre-defined and vary from 30 days to 5 years. Some of the most commonly offered tenures are 30 days, 180 days, 370 days and 395 days.

As they invest in debt instruments, FMPs provide low risk of capital loss vis-à-vis equity funds. As the securities are held till maturity, FMPs are not affected by interest rate volatility.

Additionally, from a taxation point of view, FMPs offer better post-tax returns than fixed deposits as well as liquid and ultra short-term debt funds because they offer indexation benefits.

The demand for FMPs has risen over the past few years as they are seen as safe investment opportunities.

FMPs 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. As explained above, an FMP portfolio consists of various fixed income instruments with matching maturities. Based on the tenure of the FMP, a fund manager invests resources in instruments in a manner 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.

Hence, FMPs are not advised to those individuals who want high liquidity as your money gets locked in securities for a long time.

There is no ideal time to invest in an FMP and it is suitable if you can lock in your funds for a fixed period of time. For example, if you can lock in your funds for six months, then you can opt for a six-month FMP. Similarly, if you have the capacity to lock-in funds for three years then you should opt for a three-year FMP.

Once your funds are locked into an FMP, then the interest rate risk is quite limited. You should earn as much as is offered by the securities of matching maturities.

FMPs are also listed on stock exchanges an hence, can be traded. In fact, as per market regulator SEBI’s regulations, all closed-ended funds are required to be listed and traded on stock exchanges. Thus, this gives you secondary market liquidity in case you want to exit, although it does entail a high cost.

The bottom-line is that FMPs are a kind of debt fund that is closed ended and hence, it is able to give indicative returns by matching the investment profile of the fund with that of the maturity period of the FMP.