What are Mutual Fund Fixed Maturity Plans
If you are looking for predictable returns, start investing in fixed maturity plans.
The specialty of fixed maturity plans is that these schemes mature only after completion of a pre-defined time period.
Are you looking for a mutual fund alternative to fixed deposits? Then you can consider investing in fixed maturity plans or FMPs. There are close-ended debt funds with a maturity tenure range from one month to five years. Many investors who look for a great alternative to fixed deposits prefer the three-year fixed maturity plan to fulfill their financial objectives. Even if these funds belong to the debt fund category, this scheme is popular because it can provide steady returns to investors over a fixed-maturity period. Let us know more about the fixed maturity plan in this post.
Fixed maturity plans – An alternative to fixed deposit
If you are looking for predictable returns, start investing in fixed maturity plans. This mutual fund debt scheme of three year maturity period is a preferred investment choice for many people because of the tax benefits and liquidity that it offers. If you have a large sum of money at your disposal that you do not need for a few years, say at least three years, then you can consider investing that in fixed maturity plans.
As the name implies, fixed income plans are those mutual fund schemes that invest primarily in fixed income instruments. One of the great features of this kind of debt fund is that it has a pre-defined tenure that ranges from a month to five years. Investors can choose their investment options based on their cash flow requirements and time horizon. It is an ideal option for those who look for investment choices that generate good returns without much risk factor. You can enjoy reasonably predictable returns by investing in fixed maturity plans with a lower tax liability if you invest your money for a particular period.
Close-ended debt mutual funds
The specialty of fixed maturity plans is that these schemes mature only after completion of a pre-defined time period. These are close-ended debt mutual funds in which investors can make investments only during the new fund offer (NFO) period. They cannot make new investments in this scheme after the completion of the NFO period. An investor can redeem this investment only after it has been matured. It also does not allow premature redemption during the interim period. Different debt and money market instruments are the key investments of fixed maturity plans.
Features of fixed maturity plans
Fixed maturity plans have many similarities with fixed deposits. Both the investment options have fixed investment tenure. However, some of the key features of fixed maturity plans are:
- Close-end mutual fund plans: Fixed maturity plans are closed-end schemes. You can invest in this fund only during the NFO period of the scheme. Investors cannot make any additional investments once the NFO period is over. An investor can redeem the scheme units only after the maturity of them.
- Fixed tenure: One of the notable features of fixed maturity plans is its fixed tenure. Since FMPs usually have a maturity period of more than three years from the date of its unit allocation, it ensures to get indexation benefits to investors.
- Relatively low credit risk: Fixed maturity plans invest a major portion of its investments into high-quality money markets and debt instruments. It helps such funds to offer low levels of credit risk for its investors.
- Benefits of indexation on returns: FMPs have a maturity period of a minimum of three years, which helps investors to get long-term capital gain taxation rules. It also includes indexation benefits that reduce the overall tax liability of investors on gains.
- Minimum interest-rate sensitivity: Investments made in fixed maturity plans usually held till maturity which makes low-interest-rate sensitivity levels. An investor gets lock-in interest rates for longer periods.
Fixed maturity plans are almost similar to fixed deposits, but it has market-linked returns. Capital gains rules are applicable in case of fixed maturity plans with the benefit of indexation. Low-liquidity is another feature of this mutual fund scheme.
FMPs are close-ended funds and invest usually in bonds and other securities. Investors could earn anywhere between 6% and 8% by investing in a fixed maturity plan based on the type of bonds in their portfolio. Another advantage of FMP is that it attracts lower tax due to its indexation benefits. If you invest an amount, say Rs.100, 000 each in fixed maturity plan and fixed deposit for a period of 1200 days at the rate of 6.8% annually, FMP generates more returns than a fixed deposit. It is eligible to claim indexation benefits. The taxable capital gains for the above investment will be Rs. 7479 in the case of FMP, whereas it will be Rs.24, 818 in the case of fixed deposits. The applicable tax rate for FMP is 20.8%, but you need to pay tax at the rate of 31.20% for your returns on a fixed deposit.
With the indexation benefit, you need to pay only Rs.1556 as tax for FMP, whereas the tax you need to pay for your fixed deposit is Rs.7743. At the same time, the amount that you earn after 3 years after deducting tax for FMP is 1, 22,590, but it is only 117,075 in the case of a fixed deposit. By investing Rs.1, 00,000, you will get an investment yield at the rate of 6.39% for fixed maturity plans where you can earn only 4.91% by investing in fixed deposits. From the above example, it is clear that investing in a fixed maturity plan is better than investing in a fixed deposit.
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