Fixed Maturity Plans (FMPs)

What are FMPs?

FMPs are close-ended debt funds with a maturity period ranging from one month to five years. These plans are predominantly debt-oriented, while some may have a small equity component. The fundamental objective of FMPs is to provide steady returns over a fixed-maturity period, thus protecting investors from market fluctuations. 

 

What are the benefits of FMPs?

Capital Protection - FMPs provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Better Returns - FMPs offer better post-tax returns than FDs as well as liquid and ultra short-term debt funds.

Less Exposure to Interest Rate Risk - As the securities are held till maturity, FMPs are not affected by interest rate volatility.

Tax Benefit - FMPs score over fixed deposits because of their tax effectiveness both in the short-term and long-term.

Lower Cost - Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments.

Double Indexation Benefit - Indexation helps to lower capital gains and thus lower the tax. Double indexation allows an investor to take advantage of indexing his investment to inflation for 2 years while remaining invested for a period of slightly more than 1 year.

How do FMPs work?

A portfolio of FMPs consists of various fixed income instruments with matching maturities. On the basis of the tenure of the FMP, a fund manager invests in instruments in such a way, that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan. 

Who should invest in FMPs?

• Investors looking at stable returns over the medium-term
• Investors who are not pleased with returns from traditional fixed income avenues like Bank deposits, Bonds etc.
• Investors who want to invest money for a fixed tenure to meet certain financial goals in the  future
• Investors with a conservative and risk averse profile
• Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income

Where do FMPs invest?

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like ‘AAA’ rated corporate bonds) over a defined investment tenure and sometimes even in bank fixed deposits.

What is the difference between FMPs and bank fixed deposits (FDs)?

Returns - FMPs are the equivalent of a fixed deposit (FD) in a bank. While, the maturity amount of a fixed deposit in a bank is guaranteed, the maturity amount of an FMP is not guaranteed.

Duration of Investment – FMPs invest as per the tenure of the Scheme i.e ranging from  1 month to 3 years. FDs on the other hand have an investment horizon of 15 days to 10 years.

Taxation - In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab. If you invest in the growth option of an FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate. If you invest in the growth option of an FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation.

Example – The following comparative table shows the returns where an Individual investor has invested 10,000 in a Fixed Deposit and a Fixed Maturity Plan for six months in the dividend option.

Particulars	FMP	FD
Amount Invested	10,000	10,000
Rate of Return	10	10
Projected Maturity Value ()	10,493	10,493
Gross Dividend/Interest ()	493	493
Dividend Distribution Tax / Short term Capital Gains Tax Rate %	14.1625	33.99
Tax ()	61	168
Net Dividend / Interest ()	432	326
Post Tax Value ()	10,432	10,326
Post Tax Returns	8.76%	6.60%

Note:-

• The investor in this example falls in the highest tax bracket.
• The 10 % return used in the example for FMP is for illustrative purposes only and not assured and the actual returns may go up or down depending on the market conditions. The Fixed Deposit rate is also for illustrative purposes only.

In case of FMPs; all accretions are assumed paid on maturity.