As the name suggests, fixed maturity plans (FMP) are those that invest in fixed income instruments (debt) and have a fixed maturity period. These are closed end mutual funds that invest in corporate bonds, government bonds, certificates of deposits (CD), money market instruments, government issued securities, commercial papers (CP), non convertible debentures (NCD), and so on. FMPs can be subscribed only during the launch period. That is why they are called closed-end debt funds.
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Net asset value (NAV) is the market value of the securities held by an FMP. Net asset values change daily as market rates changes. The NAV value is declared each day after market hours. This means, FMPs are riskier than fixed deposits.
See Also: Things To Remember Before Investing In A Debt Mutual Fund
Therefore, investors who are capable of bearing market risk and require a higher return than FDs can invest in FMP. They are less risky compared to equity funds. Liquidity is less in FMP. It can be received only after the fixed maturity period ends. So, investors who require investments with high liquidity are advised not to invest in FMPs.
Once you invest in a Fixed Maturity Plan, the fund manager will invest the amount in securities with a fixed tenure like bonds, Commercial Paper or Certificate of Deposits. The maturity period of these instruments matches the FMP’s maturity. At the end of the FMP term, these securities are redeemed and principal amount is returned to the investor.
During the term of the FMP, investors cannot redeem the units. Along with the maturity yield, investors will also receive interest on FMP periodically. This fluctuates and depends on market rates. Unlike FDs, it does not provide a fixed interest on the security owned.
See Also: Debt Mutual Funds - A Complete Insight
|
FD |
FMP |
Interest rate |
Fixed |
Fluctuating, Could offer higher interest than FD |
Returns/Yield |
Fixed, the subscriber will know the total returns from investing in FD beforehand. |
Not fixed. Could yield more returns when compared to FDs. |
Taxation |
-Interest income added to investor’s income and taxed accordingly. -No indexation benefit. |
-Depends on maturity period. -Indexation benefit present. -Indexation considers inflation on gain before taxation. |
liquidity |
Comparatively more. |
Very low |
Credit risk |
nil |
Present. |
Safe and Secure Returns: FMPs invest in debt securities. Debt securities are safer than equity funds. FMPs invest in government bonds, institutional debt, and highly rated instruments. This means the risk of default (not being able to pay back the debt) is low.
See Also: What are Debt Funds? Do Debt Funds Give Good ROI in the Long Run
Indexation adjusts income payments by means of a price index. It is applicable only on long term capital gains (LTCG). Indexation aims at adjusting the purchasing price of investments considering the impact of inflation. This in turn will reduce your tax liabilities.
Two important features of indexation are inflation and capital gains. Inflation is the rise in prices of goods and services with time. Capital gain is the difference in the purchase and selling price of an investment. The difference will be the capital gain of the investor.
SI |
FY |
CII |
1 |
2001-02 |
100 |
2 |
2002-03 |
105 |
3 |
2003-04 |
109 |
4 |
2004-05 |
113 |
5 |
2005-06 |
117 |
6 |
2006-07 |
122 |
7 |
2007-08 |
129 |
8 |
2008-09 |
137 |
9 |
2009-10 |
148 |
10 |
2010-11 |
167 |
11 |
2011-12 |
184 |
12 |
2012-13 |
200 |
13 |
2013-14 |
220 |
14 |
2014-15 |
240 |
15 |
2015-16 |
254 |
16 |
2016-17 |
264 |
17 |
2017-18 |
272 |
18 |
2018-19 |
280 |
19 |
2019-20 |
289 |
Indexed cost = (CII for the year of sale/ CII for the year of purchase)* cost of purchase
Indexed Cost = 289 / 264 * 1,00,000 = 1,09,000.
Sale Value – Indexed Cost
(3,00,000 – 1,09,000) = Rs 1,91,000. You have 20% LTCG tax on Rs 1,91,000 = Rs 38,200.
Fixed maturity plans are a good investment option for those who expect to have increased returns with average risk involved. It provides less liquidity as they are fixed tenure schemes. Tax benefits on FMPs are remarkably profitable.
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