What is FMP in Mutual Fund ? All About Fixed Maturity Plan

Fixed Maturity Plan

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.

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