A Fixed Maturity Plan is a closed-end debt mutual fund scheme. An FMP looks similar to a fixed deposit where one puts money for a specific period and gets it back at maturity with a specific tenure say 3 to 4 years along with some appreciation. The difference is that one cannot withdraw before maturity, but can sell it on the stock exchange. FMPs are not available for subscription continuously. The fund house comes up with a New Fund Offer which affixes an opening and a closing date. After the closing date, the offer ceases to exist.
FMPs are meant to lock investments at amazingly high yields prevailing during the specified period. FMPs are called to be a good option when interest rates are high as they intend to buy securities with high yields. It is known to all that debt funds come with interest rate risks. FMP entails that investors stick around till maturity and earn better yields due to the fact that interest rates and prices of debt securities move in opposite directions. This feature has made FMPs to become the latest substitute to conventional fixed deposits.
FMPs invest further in debt instruments to name a few; commercial papers, certificates of deposit, corporate bonds, money market instruments and fixed deposits. The fund manager invests in instruments having similar the desired maturity period. The fund manager ritually sticks to a buy and hold strategy which helps to keep the expense ratio of FMPs at a lower level than other debt funds.
Unlike the guaranteed returns that reflect on the FD certificate, FMPs offer an indicative yield but not assured which gives a chance of the actual returns being higher or lower than the returns indicated during the launch. The value of your Fixed Maturity Plan is reflected by the Net Asset Value of the fund on a daily basis. Mentioning that NAV of the fund fluctuates every day as interest rate movements in the economy can affect it. This makes FMPs riskier than FDs.
FDs assure returns whereas FMPs indicate a probable return as its affected by the interest rate risk. One should know the difference and expect a little change in the returns during the initial buying phase. FMPs can also be useful for investors in the high-income tax brackets by giving them the option of making similar returns at a much lower tax rate.
Look for the investment objective of the scheme with yield and investment strategy. Once on level with these, then invest an amount that can be invested for a minimum of three years and reap tax-efficient returns. Post-2014, due to a change in the tax treatment of debt funds, FMPs are ideal for those who have no liquidity requirements for at least 3-5 years.