Everything You Must Know About Fixed Maturity Plans
Do you plan to take a vacation in the next three years or plan to create some corpus to fund your child’s higher education or have some expenses lined up in the near future? Then Fixed Maturity Plan (FMP) is for you which comes with a fixed maturity period. You may ask, why not invest in Fixed Deposit (FD) which also comes with a fixed lock-in period? Let us explain the difference, the meaning of FMP, and several benefits of FMPs. So, let’s dive in.
What are FMPs and how are they different from FDs
FMPs are close-ended debt funds that come with a fixed lock-in period. The investments collected by the fund are further invested in instruments such as certificates of deposits (CDs), commercial papers (CPs), market instruments, corporate bonds, etc. FD comes with a fixed rate of return which will be known to the investor. Whereas, when you invest in FMP, the returns will fluctuate and may offer higher or lower returns depending on the market.
How FMPs work
When you invest in FMPs, the returns will always be indicative and not absolute like FDs. So, returns are estimated based on the debt securities that are invested. These securities have to match the duration of the FMPs which come with a fixed lock-in period.
Benefits of FMPs
Lower risk: The FMPs are invested in debt funds which are low-risk avenues as compared to equity funds.
Safer: Since these funds are invested in safe investment havens such as government bonds, which are less likely to default, they offer safety to the investor.
Interest rate risk: The increase in the rate of interest will have a negative impact on open-ended debt funds. Since the FMPs are close-ended, the rate of interest does not affect the returns.
Lower expense ratio: The funds that require are to be monitored frequently to buy and sell at the right time to ensure higher returns and lower risk have a higher expense risk ratio. Since FMPs come with a fixed maturity, it is easier for the fund managers to monitor the funds and hence these funds usually come with a lower expense ratio.
Tax benefits: Did you know that FMPs offer tax benefits? Thanks to indexation. This means the return that you will earn at the end of the maturity period will be adjusted through indexation. So, the amount that you receive at the end of the maturity will be first adjusted as per the inflation and then taxed. The debt funds attract a 20% capital gains tax after three years. Therefore, the lower capital gains translate into lower taxes.
You should invest in FMPs if:
- You want to earn higher returns than the FDs because FMPs’ returns will fluctuate depending on the market condition. So, there is a great potential to earn profits when the market is favorable.
- You have a low-risk appetite and want to invest your money for a fixed period.
- You want to earn higher profits than the FDs would earn.
So, we hope this helps you meet your financial goals. For any assistance with FMPs, please feel free to connect with us.
