Fixed Maturity Plans
Fixed Maturity Plans (FMPs) are close-ended, debt-oriented mutual fund schemes offered by asset management companies in India. They invest in fixed income instruments such as government and corporate bonds, certificates of deposit, treasury bills, and other debt securities that generally mature around the same time as the scheme itself.
Key Features of Fixed Maturity Plans
- Fixed Tenure: FMPs have a predetermined maturity date; investors know exactly when their investment will mature.
- Close-ended: You can only invest during the New Fund Offer (NFO) period; redemption is permitted only at maturity (unless traded on the exchange).
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- Debt Orientation: Most assets are in debt securities which are less affected by equity market volatility.
- Predictability: Returns are relatively more predictable compared to open-ended debt funds since securities are held to maturity and interest rate fluctuation risk is minimized.
- Low Liquidity: Premature withdrawal is usually difficult, except for trading on the exchange or subject to exit loads
How Does Fixed Maturity Plans Works
Fixed Maturity Plans (FMPs) in India are close-ended debt mutual fund schemes that operate with a specific investment and maturity process designed to offer predictable returns with reduced risk from interest rate fluctuations.
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- Subscription Window: You can invest in an FMP only during the New Fund Offer (NFO) period. After this, the scheme is closed to new investments until maturity. The tenure is fixed and typically ranges from a few months to several years.
- Portfolio Construction: FMPs primarily invest in fixed income and debt securities like corporate bonds, government securities, commercial papers, certificates of deposit, and other money market instruments. The portfolio is constructed so that most, if not all, of the instruments mature in line with the scheme’s own maturity date.
- Holding Till Maturity: Once the investment window closes, the fund manager holds the selected securities until their maturities. This approach shields the portfolio from day-to-day interest rate changes in the market, providing greater return predictability.
- Redemption: You cannot redeem FMP investments before their maturity, except via sale on a stock exchange (if the FMP is listed), though this route often has limited liquidity. At the end of the tenure, the fund automatically redeems units and credits proceeds to investors based on the scheme’s Net Asset Value (NAV).
- Earnings and Returns: Returns are primarily derived from the interest or coupon payments of the underlying debt instruments. Since these instruments are held till maturity, returns are generally more stable and foreseeable compared to open-ended debt schemes.
Pros and cons
Pros
- Predictable Returns: FMPs invest in debt instruments with aligned maturity, providing relatively predictable returns compared to open-ended or equity funds.
- Low-Interest Rate Risk: By holding investments till maturity, FMPs minimize the impact of interim interest rate fluctuations.
- Lower Volatility: FMPs are less volatile than equity funds since they invest mainly in fixed income securities.
- Portfolio Quality: These plans often focus on higher credit quality debt instruments, potentially reducing the risk of default.
- Moderate Risk: While not risk-free, the overall risk is lower compared to market-linked equity schemes and other high-risk investments.
Cons
- Low Liquidity: FMPs are close-ended; typically, you cannot redeem units before maturity (except via stock exchange, which is illiquid in practice).
- No Guaranteed Returns: Returns are not assured or guaranteed—they depend on the actual performance and credit risk of the underlying securities.
- Credit Risk: There is always a risk that issuers of the investment instruments may default, affecting your returns.
- Lack of Flexibility: Investors cannot rebalance their portfolio or switch funds until the FMP matures.
- Limited Investment Window: Can only invest during the New Fund Offer (NFO) period; missing this window means waiting for the next scheme.
- Other Market Risks: Susceptible to default risk and, for those who sell before maturity, to interest rate fluctuations.
