Investing In Fixed Maturity Plans

Mutual fund schemes are of three types - open-ended, close-ended and interval funds. They can also be categorised as equity schemes, debt schemes or hybrid schemes. A Fixed-maturity plan (FMP) is a type of close-ended debt-oriented fund that enables investors to generate steady returns over a specific time-frame.

Under a fixed maturity plan, the investment horizon of the fund’s portfolio is closely linked to the maturity of the scheme. The fund structures the scheme around investments having a pre-determined maturity period. The tenure of an FMP remains fixed, and the duration ranges from 30 days to 5 years. These investments comprise of fixed-income securities like certificates of deposits, government securities, commercial papers, PSU & corporate bonds, non-convertible debentures and various other debt and money-market instruments.

There are various advantages of investing in a fixed maturity plan. They can be understood as-

• Clarity on Returns The portfolio construction of a fixed maturity plan gives the investor a clear picture of the anticipated returns that can be expected from the scheme if they stay invested until its maturity. Although there can be no guarantee or assurance of such gains, only fair estimates can be made. This enables investors to accordingly compare the scheme’s returns with alternative investment options like bank fixed deposits.
• Protection from Interest Rate Fluctuations Since fixed maturity plans invest in instruments that lock in the yields at the ongoing rates, the investor stays protected from adverse impacts on their returns caused due to interest rate fluctuations in the debt market.
• Tax Efficiency Under a fixed maturity plan, if a person stayed invested for a period less than 36 months, then short-term capital gain tax shall be applicable as per the investor’s income tax slab rate. However, if the FMP is held for more than 36 months, then long-term capital gains enjoy indexation benefits, which can result in lower taxes on profits made.
• Lower Expense Ratio Being close-ended schemes, fixed maturity plans do not accept any money from investors post-NFO. The fund manager, therefore, has active management responsibilities only before and during the NFO is announced. After that, the fund manager thus has a limited role ongoing role in managing the scheme, thus reducing the cost of the scheme.

FMPs are ideal for investors who are seeking to generate a stable income over a period of time through an investment option that provides comparatively better post-tax returns than other investment avenues available in the market. Investors who are looking to balance an aggressive equity-oriented portfolio may also consider investing in FMPs. In Conclusion Thus, fixed maturity plans are designed to assist investors in diversifying their portfolio through a range of debt and money-market scrips, so as to engage in lower risk as compared to equity, thus generated tax-efficient and balanced returns.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.