Should you invest in a Fixed Maturity plans?

Fixed Maaturity plans (FMP) are closed-end debt mutual funds that have a specified tenure. They invest in fixed-income securities that mature at around the same time as the fund.

- Sudipta Mitu

These funds mostly invest in corporate bonds, treasury bills, certificates of deposits, nonconvertible debentures, commercial papers, and so on. Investors get a return that is equal to the portfolio yield (minus the expense ratio).

Advantages of FMPs: The fund manager selects the debt instruments at the start of the tenure and holds them until maturity. Due to the buy and-hold strategy that these funds follow, investors are not exposed to interest-rate risk. Even if interest rates rise during the tenure of the FMP, the investor does not suffer a loss.

FMPs allow investors to lock into the prevailing interest rates. In an environment where interest rates are high and are likely to come down in the future, investors who put their money in an FMP can ensure that they get the benefit of the current high rates.

Since the fund manager does not buy and sell securities during the tenure of the FMP, costs get minimised.

FMPs are also more tax-efficient than fixed deposits. An investor in the highest tax bracket has to pay tax at the rate of 30 per cent plus in a fixed deposit. On the other hand, an investor in an FMP, who has invested for more than three years, has to pay tax at the rate of 20 per cent. He also gets the benefit of indexation. A lower tax rate helps to boost the post-tax return from an FMP.

Disadvantages of FMPs: On the flip side, investors can only invest in an FMP during a new fund offer (NFO). Once this period ends, the fund is closed to any further investment.