Fixed Maturity Plans (FMPs) are basically income/debt schemes giving a fixed return over a period of time. FMPs are similar to close ended schemes, which are open only for a fixed period of time during the initial offer. However, unlike closed ended schemes where an investor’s money is locked for a particular period, FMPs give the investor an option to exit, which is subject to an exit load as per the funds regulations.
FMPs are launched in the form of a series i.e. each series replaces the one which has matured. e.g. Fund ‘A’, launches an FMP Series I having 90 days maturity, after 90 days that scheme matures and automatically Series II starts with 90 days maturity. As per SEBI, if an investor wants to redeem from any of the series he has to give a redemption request 10 days prior to the maturity date of that scheme. Incase the investor doesn’t give the redemption request his funds will be carried forward to the next series wherein he has to stay invested for an additional 90 days or can redeem by paying an exit load.
Investment pattern:
FMPs primarily invest in debt instruments like Bonds, Debentures and Money market instruments. The fund manager invests in these instruments and holds them till maturity giving a fixed return to the investor.
Let’s take an example where fund ‘A’ is launching an FMP of 90 days maturity. The fund invests the proceeds in an instrument where the indicative yield is 8.25%. Based on this lets see how does the return works out
| 90 Day FMP Plan |
*Growth |
Dividend |
| Indicative yield (A) |
8.25% |
8.25% |
| Expenses charged (B) |
0.60% |
0.60% |
| Indicative yield net of expenses (A-B) |
7.65% |
7.65% |
| Dividend tax |
0.00% |
0.70% |
| Actual return |
7.65% |
6.94% |
| Pre tax return (Individual- 30.6%) |
11.02% |
10.00% |
| Pre tax return (Corporate- 35.7%) |
11.90% |
10.80% |
In the above example it is shown that the growth option gives a return of 7.65% and the dividend option gives a return of 6.94%. But in case of the growth option if we assume that the investor has some capital loss that can be offset against the gain from this investment than the yield would work out to be over 11.02% (tax slab 30.6%) in case of individual and over 11.89% in case of corporate (tax slab 35.7%). However in dividend option the yield works out to be over 10.00% in case of an individual and over 10.79% in case of corporate as the asset management has paid 10.2% dividend tax.
Investment period:
FMPs are launched in the form of series having different maturity profile. The maturity period varies from 3 months to one year.
Benefits of FMPs:
- Minimal risk: Unlike debt funds, which are exposed to three kinds of risks viz. interest rate, credit and liquidity risk, FMPs are a better option. FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return. They primarily invest in AAA or P1+ rated instruments with a short-term maturity profile from 3 months to 12 months so there is also low credit risk. FMPs have minimal liquidity risk as they invest in short-term instruments, which give them adequate liquidity, and also as they have a fixed maturity profile the investor can expect a fixed return if he holds till maturity and hence there is less redemption pressure.
- Minimal expenses: FMPs because of their very nature of holding the instrument till maturity minimise expenses. As there is no regular churning of the portfolio, this reduces costs incurred in buying these instruments and also the fund managers cost of reviewing the portfolio on a regular basis.
An investor who invests regularly in fixed deposits (FDs) should definitely consider investing in FMPs, which can yield better returns. Moreover, an investor benefits from tax-free dividends, whereas in the case of FDs, interest income over and above Rs 5,000 per annum is taxable. A Non-resident can also invest in these schemes.
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