All you need to know about fixed maturity plans or FMPs

FMPs are closed end debt funds with a maturity period that can range from one month to five years.

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Since the securities in the portfolio are held till maturity, FMPs are not affected by interest rate volatility.
An FMP is one of the debt products that are offered to many first-time investors looking for an alternative to fixed deposits because they are tax efficient. ET helps you understand what an FMP is.

What are fixed maturity plans?
FMPs are closedend debt funds with a maturity period that can range from one month to five years. Because debt funds enjoy long-term capital gains tax after three years, typically three-year FMPs are now popular. FMPs are predominantly debt-oriented, and their objective is to provide steady returns over a fixed-maturity period, thereby protecting investors from market fluctuations.


Why are FMPs in focus now?
A few FMPs holding paper of Zee/Essel Group have come up for maturity starting April 8. On maturity, these schemes should pay back full amount to investors which includes principal plus earnings on the portfolio. However, since these FMPs have paper belonging to Zee/ Essel Group in their portfolios, one fund house is repaying investors money minus their holding in Zee/Essel paper. Another fund house has proposed to rollover its FMP by a period of 380 days.

How do FMPs work?
An FMP portfolio consists of various fixed-income instruments with matching maturities. Based on the tenure of the FMP, a fund manager invests in instruments in such a way that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan.

Where do FMPs invest?
FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), moneymarket instruments, non-convertible debentures over a defined investment tenure. Sometimes, they also invest in bank fixed deposits.
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Are FMPs liquid?
Since FMPs are closed-end funds, they can only be traded on the stock exchange where they are listed. However, trading in these units is negligible which makes FMPs illiquid. Compared to this, openended debt funds can be bought or sold on a daily basis.

What are the benefits of FMPs for investors?
Capital protection and no interest rate volatility: Since FMPs invest in debt instruments, they provide low risk of capital loss as compared to equity funds. Since the securities in the portfolio are held till maturity, FMPs are not affected by interest rate volatility.

Taxation benefit: FMPs offer better post-tax returns than FDs as well as liquid and ultra short-term debt funds because they offer indexation benefits. Indexation helps to lower capital gains and thus lower the tax. Triple indexation allows an investor to take advantage of indexing his investment to inflation for 4 years while remaining invested for a period of slightly more than three years.

Lower expense ratio: Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments, thereby resulting in a lower expense ratio for investors.
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