What is a fixed maturity plan?

Fixed maturity plans, or FMPs are investment schemes floated by mutual funds. Similarly to bank fixed deposit (FD), FMPs have different maturities like three months, six months, one and two years and rarely for three years.

FMPs are invested in instruments of matching maturity therefore investors get a rough idea how much returns he will earn at the time of subscription. There is a lock-in-period therefore investors get protection against interest-rate risks.

Moreover, on FMPs with a maturity of over one year investors get tax advantage over fixed deposits. In FMPs, investors get an option to pay tax on long-term capital gains at 10% without applying indexation or 20% after applying indexation to the cost of acquisition.

On the other hand, investor has to pay tax on interest earned from FDs according to his tax bracket. But, FMPs don’t offer assured return or capital protection, as investor get in bank FDs.

Before investing in FMPs there are few things which should be taken into consideration. Two years ago, during the economic crisis many fund houses got into trouble as they had invested in low-rated papers from dubious companies, mainly in the real estate, so it becomes very important to check the reputation of the fund houses. However, fund houses managed to come out safely from the terrible situation as the regulator intervened in the matter and led a helping hand to them.

These days’ investing in FMPs is risky as you will neither have an indicative portfolio nor return so everything will depend on the integrity of fund houses.

Generally an investor should not exit till FMPs get mature, but fund houses now days list FMP on stock exchanges so that investors can easily exit if they are in urgent need of money. In this there is no guarantee of enough liquidity and get good value.

Therefore, investment in FMPs should be made only when you are prepared to take a little risk to earn bigger tax- efficient returns.