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Fund categories
Equity
Debt
Fund categories
Equity
Debt
Fixed Maturity Mutual Funds (FMP)
Fund categories
Fixed Maturity Plans (FMPs) are closed-end debt mutual fund schemes that invest in fixed-income securities. This includes government securities, commercial papers, and other debt securities. These mutual funds have a specified maturity period, typically ranging from 1 month to 5 years. Hence, it is designed to align with investors' specific investment horizons.
How Do FMPs Work?
Fixed Maturity Plans (FMPs) operate on a straightforward principle within the mutual fund framework. When launched, the fund house opens a brief subscription period for investors to contribute capital. Once this window closes, the fund manager invests the pooled money in a portfolio of fixed-income securities. It could either be corporate bonds or commercial papers. These securities are carefully selected to mature around the funds’ predetermined end date.Characteristics of the Best Fixed Maturity Plans
Knowing the characteristics enables informed investment decisions by evaluating risk level, maturity duration, and expected returns. This understanding helps secure stable income, reduce volatility, and align with financial goals. These are some factors that you must consider before investing:- Closed-end structure: These funds are closed-end mutual funds with a fixed maturity period. Once the initial subscription period ends, no new investments are allowed.
- Debt-oriented portfolio: These plans invest in fixed-income instruments like corporate bonds and other debt securities.
- Defined maturity and passive management: These funds have a specific maturity date aligned with the underlying securities. Fund managers generally follow a buy-and-hold strategy until maturity to reduce active management.
- Indicative yield and credit risk: Fund houses provide an indicative yield at launch based on current market conditions. However, actual returns depend on the timely repayment of underlying debt securities.
Advantages of Fixed Maturity Mutual Funds
Knowing the advantages is crucial to making informed investment decisions. These funds offer predictable returns and minimized interest rate risks. For more clarity, below are some key advantages of investing in these funds:- Predictable returns: FMPs offer relatively stable and predictable returns. This is because they invest in fixed-income securities with matching maturities.
- Tax Efficiency: These plans can provide tax benefits when held for over three years. They're treated as long-term capital gains with indexation.
- Portfolio Diversification: These mutual fund plans add diversity to an investment portfolio. They can balance the risk by including fixed-income securities alongside other asset classes.
- Lower volatility: These plans typically experience less price fluctuation compared to open-ended debt funds. It helps the fund present itself as a more stable investment option.
Limitations of Fixed Maturity Plans
Fixed Maturity Plans (FMPs) have several limitations. They offer limited liquidity, as they're designed to be held until maturity with restricted exit options. Returns are not guaranteed and can be impacted by interest rate fluctuations. FMPs also carry credit risk if underlying securities default. Their closed-ended nature means investors can't take advantage of market opportunities or adjust their portfolios easily during the investment tenure.Taxation on Fixed Maturity Mutual Funds
For tax purposes, FMPs are usually regarded as non-equity mutual funds. Gains are taxable at your income tax slab rate and are regarded as short-term capital gains if held for less than three years. Long-term capital gains are gains from investments held for longer than three years. These have indexation benefits and a 20% tax rate.Investment Strategy and Corpus Allocation
Fixed Maturity Plans typically follow a buy-and-hold strategy, aligning their portfolio duration with the plan's maturity. The corpus is primarily allocated to debt instruments like corporate bonds, government securities, and money market instruments. Fund managers aim to match the maturity of these securities with the FMP's tenure to optimize returns and manage interest rate risk.Investor Profile: Who Should Invest in FMPs?
Investors suited for Fixed Maturity Plans (FMPs) typically have specific financial goals aligned with the plan's fixed tenure. FMPs appeal to those comfortable with limited liquidity, as these plans are designed to be held until maturity. They are particularly attractive to investors in higher tax brackets.Things to Consider Before Investing in FMPs
Knowing key considerations before investing is crucial to understanding liquidity constraints, tax implications, and interest rate risks. These insights ensure that you understand things more clearly and get better returns.So, to help you further, here are some things that you must be informed about before investing:- Lock-in period: These plans typically have a fixed tenure, often 3-5 years. Consider your liquidity needs before committing funds for this duration.
- Credit risk: Evaluate the underlying portfolio's quality, including corporate bonds and commercial papers. Check the fund's credit ratings carefully.
- Interest rate sensitivity: These plans are vulnerable to interest rate changes. Rising rates may lead to opportunity costs during the lock-in period.
- Tax implications: Understand the tax treatment of your chosen plan's return. Consider your tax bracket and compare after-tax returns with other investment options.
FAQ’s
In what scenarios might FMP schemes underperform, despite their controlled risk structure?
The underperformance may occur due to debt defaults, high inflation, or unfavorable market conditions at maturity if an early exit is needed.
Are there any sectoral or credit diversification guidelines that FMPs must follow?
These funds follow SEBI guidelines on sector and issuer concentration limits, diversifying across sectors, and maintaining a mix of credit ratings.
How transparent are FMP portfolios to investors before and during the investment tenure?
These funds disclose indicative portfolios pre-launch and provide monthly factsheets. Real-time changes aren't immediately visible due to their closed-end nature.
What are the legal or regulatory constraints on premature withdrawals from FMPs?
SEBI prohibits premature withdrawals. These funds can be sold on exchanges but often lack liquidity. Exit loads may apply for early redemptions.
How do FMPs fit into a diversified investment portfolio, given their fixed tenure and lower liquidity?
These funds offer stability and potentially higher returns than FDs, suitable for specific goals aligned with their tenure, complementing more liquid investments.
