Fixed Maturity Plans (FMP) in Mutual Funds – Should you invest or avoid?
Have you ever thought of such investments that are as safe as bank fixed deposit, but provide better returns than it. Fixed Maturity Plans (FMPs) are one such investment instruments that combine the goodness of FDs and security together with the returns. What are fixed maturity plans (FMPs) in Mutual Funds? What are the benefits and drawbacks of Fixed Maturity Plans? Should you invest in Fixed Maturity Plans (FMP) of Mutual Funds?
What are Fixed Maturity Plans (FMPs) in Mutual Funds?
FMPs are close-ended debt funds that primarily make an investment in money market instruments that carry fixed income like certificates of deposits, corporate bonds, commercial papers etc. They come with a pre-defined period of tenure. The investment can be made in the NFO (New Fund Offer) period, which is about 2-3 days. After this period, the investment is closed and further investments are not accepted. The minimum investment is usually Rs. 5,000. Generally the naming convention is like “… 1115-Days” means the FMP fund would mature in 1115 days. Typically, the fund house fixes a target amount for a particular scheme which it ties up informally with borrowers before the scheme opens. As the fund houses know the interest rate that they are going to earn on its investments, it can provide indicative returns to investors.
What does the FMP Portfolio consist of?
FMP Mutual fund's portfolio generally consists of:
1) Certificate of Deposits / Bank Fixed Deposits
2) Non Convertible Debentures (NCDs)
3) Corporate Bonds
4) Government Bonds
5) Treasury Bills and Commercial Papers, etc.,
Benefits of Fixed Maturity Plans
As these schemes are open for a very small period, they are not advertised heavily and the agent commission on such schemes is also very low. These plans are launched on a regular basis by mutual fund companies.
If a comparison is drawn between bank FD and FMP of the same tenure, FMPs give higher returns than FD.
FMPs are categorized under debt scheme and so it enjoys certain tax benefits. Long-term capital gains enjoy the indexation benefit. From the taxation point of view, if FMPs are held for more than three years, are taxed at the rate of 20% with indexation benefit. If investments are held for less than three years, the income is treated as short-term capital gain and added to investor’s income.
Drawbacks of Fixed Maturity Plans
The biggest drawback of FMP is its non-liquidity. Money once locked in the FMP cannot be redeemed before its maturity. Most of the FMPs are launched with a period of three years. AMCs do come out with short FMPs of say two to three months, but they are most popular amongst institutional investors. However, these funds are listed on stock exchanges, however there are rare buyers when anyone wants to sell.
It is not that FMPs do not carry risk at all. They do possess a credit risk. Any downgrading in the rating of the FMP can adversely affect its return, so, the investors are advised to check the indicative portfolio allocation before investing in particular FMP.
The actual returns from FMP can vary slightly from the returns indicated whereas the bank FD interest would not change during the tenure of the FD.
How FMP in mutual funds are tax efficient then Bank FDs?
While there could higher returns in FMPs compared to bank FDs, in some cases, even if we assume that we are getting similar returns, these are tax efficient. Les us see with an example. First illustration would provide the post tax returns for individuals in the 30 % tax bracket and second illustration would provide post tax returns for the 20 % tax bracket. Cost of indexation = Cost rate in FY17-18 / FY15-16 x Rs 1 Lakh
How to invest in FMP Mutual Funds?
FMP mutual funds would open during NFO Period. You need to invest in these funds only during that period. You can visit valueresearchonline or moneycontrol.com or any other mutual fund website that shows the running FMP mutual funds.
Some FMP's launched in August-2018
Here are the details of few FMPs that are open now. One should review the investment objectives before investing in these FMPs.
Also Read: Best Goal Based Mutual Funds to invest
Should you invest in Fixed Maturity Plans (FMP) of Mutual Funds?
FMPs are a brilliant investment option for conservative investors who go for rather safe investments and are in search of some other option than bank fixed deposits. As the returns are high, it is an apt time to invest for a time horizon of around 3 years. However, one need to assess the credit risks in FMP in mutual funds before investing in such investment options.
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Fixed Maturity Plans (FMP) in Mutual Funds