Fixed Maturity Plans – What are FMPs

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Updated on May 10, 2018 - 05:16:12 PM
Fixed Maturity Plans (FMPs) are mutual funds which have become the latest
alternative investment havens to the conventional Fixed Deposits (FDs). In this article,
we will learn more about FMPs and how it is different from FDs.

1. What are Fixed Maturity Plans (FMPs)?

2. FMP – Investment Streams
3. FMPs and FDs
4. Who should invest in FMPs?
5. Things to consider before investing in FMPs
6. Recent Developments

1. What are Fixed Maturity Plans (FMPs)?

FMPs are closed-end debt funds having a fixed maturity period. Unlike other open-
ended debt funds, FMPs are not available for subscription on a continuous basis.
The fund house comes up with a New Fund Offer (NFO) for a specific duration. NFO
will have an opening date and a closing date. You may invest in the NFO only during
these days. Upon expiry of the closing date, the offer to invest ceases to exist.

2. FMP – Investment Streams

FMPs usually invest in debt instruments like a certificate of deposits (CDs), money
market instruments, corporate bonds, commercial papers (CPs) and bank fixed
deposits.
Based on the duration of the scheme, the fund manager allocates your money in
instruments of similar maturity. For example, if FMP is for 5 years, then the fund
manager invests in a corporate bond having a maturity of five years.
Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy.
There is no frequent buying and selling of debt securities like other debt funds. This
helps to keep the expense ratio of FMPs at lower level vis-a-vis other debt funds.

3. FMPs and FDs

Being a debt instrument, FMPs and FDs have a lot of similarities between them.
Both require you to stay invested for a fixed duration. Both of them are available in
varying maturities to suit your convenience.
However, FMPs are a stark contrast to FDs from a returns perspective. Unlike the
guaranteed returns that reflect on the FD certificate, FMPs offer an indicative
yield. It means that the returns offered by FMPs are not assured but indicative in
nature – there is a chance of the actual returns being higher or lower than the returns
indicated during the NFO.
Many people compare FMPs with bank FDs. However, FMPs and FDs differ in more
ways than one:

Parameter FMP FD

Returns Indicative Returns Assured Returns

Tax 1. Dividend Option - DDT tax Interest earned is added to your income, and the income
2. Growth Option - Tax on is taxed accordingly
capital gains

Liquidity Restricted liquidity Ease of premature redemption, higher liquidity