hat are Fixed Maturity Plans
Finance

Fixed Maturity Plans: Meaning, Objectives, features and Limitations

What are Fixed Maturity Plans

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Fixed maturity plans (FMPs) are a form of closed-ended debt mutual fund that matures after a certain period of time has passed. As a result, you can only invest in an FMP during the new fund offer (NFO) era. No new investments in an FMP scheme can be made after the NFO duration has ended. Furthermore, fixed maturity plan contributions can only be repaid after the scheme has matured; no units can be redeemed before the scheme has matured. 

Objectives

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A fixed maturity plan’s main goal is to achieve consistent returns over a set period of time. This strategy also shields investors from market swings. Fixed maturity plans do not accept subscriptions on a continuous basis, so the fund house creates a new fund offer (NFO) for a specific time period. There is an opening and closing date for NFO. Only during these days can you invest in the NFO. The offer to invest is no longer valid after the closing date has passed.

Key Investments of Fixed Maturity Plans

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FMPs’ key investments are different debt and money market instruments as a result of their classification as non-equity investments. FMPs’ most common debt investments include the following:

  • CBS (collateralized borrowing and lending obligations)
  • Government Securities (G-Secs) 
  • T-Bills (Treasury Bills)
  • Highly-rated NCDs (non-convertible debentures)
  • Securitized Debt Instruments
  • CDs (certificate of deposits)

The list of FMP investments above is illustrative; the allocation of individual instruments in the scheme’s portfolio, as well as their credit quality and residual maturity, can differ significantly from one FMP to the next.

Features of Fixed Maturity Plans

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Fixed Tenure

An FMP’s maturity date is set, and once you’ve invested through NFO, your money is effectively locked in until maturity. FMPs usually have a maturity period of more than three years from the date of unit allocation. This ensures that indexation benefits on FMP investments are available.

Closed-Ended Schemes

This usually means that you can only invest in the scheme during its initial public offering (NFO) phase. Investors can no longer make new investments after the NFO duration has ended, and scheme units can only be redeemed after they have reached maturity.

Sensitivity to Interest Rates

Fixed maturity plans have a low interest rate risk since the fund keeps the instruments until they mature, allowing it to earn a reasonably constant rate of return. 

Indexation Benefits on Returns

The majority of new FMPs have a three-year or longer maturity period. This means that capital gains from non-equity assets are subject to long-term capital gains tax laws, including indexation benefits. Investors benefit from indexation when inflation is factored in, lowering total tax liability on gains. Learn more about the taxation of mutual funds.

Balancing of Portfolio

Fixed maturity plans have consistent returns over time and serve as an asset allocation tool, allowing the scheme to attract investors from a diverse pool of investors.

Limitations  of Fixed Maturity Plans

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Low liquidity

Due to the fact that scheme units cannot be redeemed before the FMP schemes’ maturity dates, these funds may have low liquidity. If you want to cash out your FMP savings before they mature, go to the stock exchange where the scheme is listed. However, in the case of stock exchange redemptions, a Demat account is needed, and trading volumes are sometimes insignificant.

Returns not Guaranteed

Fixed Maturity Plans offer investors the security of guaranteed returns on instruments held to maturity, while high-quality investments reduce credit risk. However, low potential risk does not imply no risk for investors, and FMP returns are still market-linked. As a consequence, unlike other fixed-return instruments such as fixed deposits, FMP returns are not assured.

Locked-In Rates

While locked-in rates are an excellent choice during a falling interest rates regime, the same can become a problem during a period of rising interest rates. When market rates move upwards, locked-in rates can lead to missed opportunities concerning potentially higher returns coupled with possibly lower risk levels.

Difference between FMPs and Fixed Deposits

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By new investors, fixed maturity plans may appear to be identical to fixed deposits. While these investments are similar in that they both have a fixed investment term, there are a few main differences between fixed maturity plans and fixed deposits and that are:

Comparison CriteriaFixed Maturity PlansFixed Deposit
ReturnsMarket – Linked ReturnsGuaranteed Returns
TaxationCapital Gains Taxation Rules apply to the  benefit of indexationTaxation is as per IT slab rate of investor
LiquidityLow LiquidityPremature withdrawal options with penalties available (more liquid than FMPs)
Maturity OptionsVaries for each scheme (typically 3-4 years)Varies by a bank (typically 7 days to 10 years)

List of Top Fixed Maturity Funds to Invest in 2020

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SBI Fixed Maturity Plan (FMP) – Series 5 (92 Days) Direct – Dividend
SBI Fixed Maturity Plan (FMP) – Series 8 (1178 Days) Regular – Growth
Tata Fixed Maturity Plan Series 56 Scheme E Regular – Growth
Tata Fixed Maturity Plan Series 46 Scheme K Regular-Dividend
Tata Fixed Maturity Plan Series 31 Scheme C -Growth
Tata Fixed Maturity Plan Series 49 Scheme B Plan A-Growth
SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan
SBI Fixed Maturity Plan (FMP) – Series 24 (1107 Days) – Regular Plan

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