When it comes to investments, most people look for safety, steady returns, and clarity about when they will get their money back. For those who don’t want daily market ups and downs, Fixed Maturity Plans (FMPs) have become a good choice.

An FMP is a type of debt mutual fund that works like a mix of a fixed deposit and a mutual fund. Just like an FD, you invest your money for a fixed time, but unlike an FD, the money in an FMP is invested in bonds, government securities, or other debt instruments that also mature around the same time.

These plans are especially popular among investors who fall in higher tax brackets, because of their taxation benefits compared to normal fixed deposits.

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What Exactly Are Fixed Maturity Plans?

Fixed Maturity Plans are closed-ended debt mutual funds. Closed-ended means you can invest only during the New Fund Offer (NFO) period and you cannot withdraw your money till the maturity date.

The fund manager of an FMP invests the collected money in fixed-income instruments like:

Corporate bonds
Government securities (G-secs)
Certificates of deposit
Commercial papers

The main idea is to match the maturity date of the investments with the maturity of the scheme. For example, if the FMP is for 3 years, the fund manager will put money into bondsor papers that also mature in 3 years.

Because of this matching, there is better predictability of returns than in open-ended debt funds. However, FMPs don’t guarantee returns like FDs. They depend on the interest rates agreed at the time of investment.

Investors who want to park money for a fixed period and are okay with moderate liquidity restrictions often choose FMPs.

Core Features of Fixed Maturity Plans

FMPs come with certain features that make them different from other mutual funds:

1. Fixed Tenure:

Every FMP has a specific time frame like 1 year, 3 years, or 5 years. Investors have to stay invested till that period ends.

2. Listed on Stock Exchange:

Technically, FMPs are listed on stock exchanges. But liquidity is usually very low, so selling in between is not easy.

3. Lower Risk Compared to Equity Funds:

Since investments are made in debt instruments, the risk is lower than stock market funds.

4. Tax Efficiency:

FMPs offer indexation benefits on long-term capital gains, making them more tax-efficient compared to bank FDs.

5. Predictable Returns:

While not guaranteed, returns are fairly predictable as the investments are locked into securities that mature along with the plan.

6. Investment Route:

You can invest only during the NFO window. After that, no new investment is allowed until maturity.

How Do Fixed Maturity Plans Work?

When you invest in an FMP during its NFO, your money is pooled along with other investors. The fund manager then invests this pool in debt instruments that match the scheme’s tenure.

Example:
If you invest ₹1,00,000 in a 3-year FMP, the fund manager may buy 3-year corporate bonds with a fixed interest rate. At maturity, the bonds repay both the principal and interest. This money is then distributed to you (after deducting fund expenses).

Because the maturity of the assets and the scheme are aligned, there is less risk of reinvestment. That’s why FMPs often give returns close to the expected yield shown during the NFO.

However, since FMPs are subject to market risks, if the issuer defaults, or interest rate movements are unfavorable, returns may differ.

Benefits of Investing in Fixed Maturity Plans

1. Tax Benefits:

Long-term capital gains with indexation (if held over 3 years) can significantly reduce tax outgo.

2. Better Than FDs for High Taxpayers:

For those in higher tax brackets, FMPs often give better post-tax returns than traditional fixed deposits.

3. Stability:

Since FMPs invest in debt instruments, volatility is lower compared to equity funds.

4. Aligned Returns:

Maturity of assets and plan tenure being the same provides predictable outcomes.

5. Professional Management:

Your money is handled by fund managers who carefully select securities with good credit quality.

Drawbacks of Fixed Maturity Plans

1. Lock-in Period:

Money is locked till maturity; premature withdrawal is not possible.

2. No Guaranteed Returns:

While returns are predictable, they are not assured like FDs.

3. Liquidity Issue:

Though listed on exchanges, trading volume is very low. Finding buyers is tough.

4. Credit Risk:

If the company issuing bonds defaults, returns will be affected.

5. Not for Short-Term Needs:

Since tenure is fixed, investors must plan properly before investing.

Taxation of Fixed Maturity Plans

Tax treatment of FMPs is what makes them attractive:

Held for less than 3 years:

Gains are treated as short-term capital gains and taxed as per your income slab.

Held for more than 3 years:

Gains are treated as long-term capital gains (LTCG). Investors get indexation benefits. Indexation adjusts the purchase price for inflation, thereby reducing taxable gains.

Example:
If you invested ₹1,00,000 in an FMP and it grows to ₹1,40,000 in 3 years, the gain is ₹40,000. But with indexation, the purchase price may be adjusted to say ₹1,10,000, so taxable gain reduces to ₹30,000. This lowers your tax liability significantly compared to an FD, where interest is fully taxed each year.

Advantages vs Limitations of FMPs – Quick Comparison

Advantages

Limitations

Lower risk than equities

No early withdrawal

Tax-efficient with indexation

Returns not guaranteed

Predictable returns

Liquidity is low

Better post-tax returns vs FDs

Credit risk exists

Professional fund management

Not useful for short-term goals

Conclusion

Fixed Maturity Plans are a middle ground between fixed deposits and debt mutual funds. They provide stability, potential tax savings, and fairly predictable returns. However, investors must remember that returns are not guaranteed, and money remains locked in till maturity.

FMPs are best suited for those who can commit funds for a fixed time frame (3 years or more) and want tax efficiency. For short-term needs or those requiring high liquidity, FDs or liquid funds may be better.

As with all investments, it’s wise to check your financial goals, risk appetite, and consult an advisor before investing in FMPs.

Frequently Asked Questions (FAQs)

What is the minimum investment in an FMP?

The minimum investment depends on the fund house. Usually, it starts from ₹5,000 or ₹10,000.

Can I withdraw my money before maturity in an FMP?

No, FMPs are closed-ended schemes. You cannot redeem before maturity, except by selling on the stock exchange, which has very low liquidity.

Are FMP returns guaranteed like fixed deposits?

No, FMPs do not guarantee returns. However, because the maturity of securities matches the scheme’s tenure, returns are more predictable than open-ended funds.

How are FMPs taxed?

If held for less than 3 years, gains are taxed as per your income tax slab. If held for more than 3 years, long-term capital gains tax applies with indexation benefits.

Who should invest in Fixed Maturity Plans?

Investors in higher tax brackets who want stable returns and can stay invested for 3 years or more can consider FMPs.

Do FMPs invest in stocks?

No, FMPs generally invest in debt instruments like corporate bonds, government securities, and certificates of deposit.

Are FMPs safe?

FMPs are relatively safe compared to equity funds but are not risk-free. Credit risk exists if the bond issuer defaults.

Can I get regular income from FMPs?

No, FMPs do not pay monthly or quarterly interest like FDs. You receive your returns at maturity.

What is the typical tenure of an FMP?

Tenure can range from a few months to 3–5 years, depending on the scheme launched by the fund house.

How are FMPs different from Fixed Deposits?

FDs give guaranteed returns and allow premature withdrawal (with penalty). FMPs don’t guarantee returns and have strict lock-in till maturity, but they are more tax-efficient for long-term investors.

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Fixed Maturity Plans or FMP - Definition, Types and Characteristics of FMP