How do FMPs work?
Fixed Maturity Plans (FMPs) are close-ended debt products which are closely aligned to the maturity of the scheme and are typically offered to first-time investors who look for alternatives to a bank fixed deposit. FMPs are tax efficient and consist of various fixed-income instruments like a non-convertible debenture, certificated of deposits (CDs), commercial papers (CPs), money market instruments etc. Sometimes FMPs also invest in bank fixed deposits. FMPs are close-ended funds which can be traded on the stock exchange. However, the trading of these units is negligible which makes FMPs illiquid.
FMPs offer a few benefits like capital protection or no interest rate volatility. The nature of picking up debt instruments naturally reduces risk when compared to equity mutual funds. FMPs offer better post-tax returns due to the indexation benefits they offer. Indexation helps lower capital gains thereby lowering taxes. FMPs are held till maturity so this saves cost with respect to buying and selling of instruments, thereby resulting in a lower expense ratio for investors.
FMPs offer certain benefits to investors. For instance, they protect capital since they invest in debt instruments and they provide a low risk of capital loss compared to equity funds. The securities here are held in the portfolio until maturity so the investments are not affected by interest rate volatility. The other benefit is on taxes as FMPs offer better post-tax returns and offer indexation which helps to lower capital gains thereby lower taxation. Since FMPs are held till maturity there is a cost saving when it comes to buying and selling of instruments which eventually reduces or lowers the expense ratio for you.Fixed maturity investments are ideal for investors who seek higher returns than a regular fixed deposit and are comfortable with random NAV fluctuation. Before you invest, you should understand that a regular bank fixed deposit offers assured returns whereas a fixed maturity plan indicates a probable return.