What are Fixed Maturity Plans?
Fixed Maturity Plans (FMP) are closed-end debt funds that have a fixed maturity period. They aren’t accessible for subscription on a continuing basis. A New Fund Offer (NFO) is introduced by the fund house for a certain duration. There will be an opening date and a closing date. You can invest only during those days because once the closing date arrives, the offer to invest will cease.
Investment streams in FMP
The fund manager allocates your money in instruments that are identified based on scheme duration. The manager holds a buy and holds strategy rather than buy and sell strategy.
FMP and FD
There are varied similarities between FMPs and FDs. For instance, both require you to remain invested for a fixed duration. Both are accessible in many maturities for suiting your convenience.
However, from a returns perspective, both are different. FMP offers an ominous yield. The returns are indicative in nature despite not being assured. The actual returns can either be higher or lower than the returns indicated during the New Fund Offer (NFO).
Who can invest in FMP?
If you are an investor who needs higher returns compared to a regular FD but might be able and willing to digest the frequent fluctuations of NAV, investing in FMP is right for you. FMPs can be low risk-low return investments, unlike equity funds.
Pay attention to some aspects before you invest. Before investing in FMP; you need to consider certain things.
A possible return is indicated by FMPs, unlike FDs where returns are assured. Investors in high tax brackets end up paying lots of tax on interest earned on their FDs. They have the option of earning similar returns at FMP at much lesser tax rate.
Invest when you know the investment objective, yield and investment strategy of the scheme. A good investment option could include long tenure FMPs too.
FMPs have indexation benefit that means you get larger returns in debt securities via FMPs after you pay tax. The returns you get from FMPs are called Capital Gains. Indexation decreases wealth profit, therefore lesser taxes.
Be warned that there could be credit risks due to the default of securities in portfolios. There is little to no liquidity available in FMP. You also cannot redeem it before maturity and if you still wish to redeem it, you might be required to sell it on the stock exchange on which the units would be listed. There are restrictions which you will have to find out before taking any such action.
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