Fixed Maturity Plan in mutual fund are the type of debt funds that have fixed maturity period. These funds invest in debt instruments like corporate bonds, commercial papers, certificate of deposits and fixed deposits as well. Fixed Maturity Plan gives indicative returns unlike the fixed returns mentioned on fixed deposits certificate. These are closed ended funds, which means you can buy them during specific time frame like during NFO (New fund offering) opening and sell them only after the maturity. They are not open continuously for buying and selling.
Let us understand about Fixed Maturity Plan in mutual funds in more detail.
What is Fixed Maturity Plan in Mutual Fund?
- Fixed Maturity Plan in Mutual Fund are the type of Debt Mutual Funds that have fixed maturity period
- These funds are closed ended funds which means you can buy them only during specific time frame – like during NFO (New fund offering) opening by fund house
- Unlike other mutual funds, FMP or Fixed Maturity Plan is not open for buying or selling continuously
- These funds are best suited for conservative investors with financial goals of 3 years to 5 years fixed tenure
- FMP invests in debt instruments like corporate bonds, commercial papers, certificate of deposits, etc.
- They usually give returns between 6% to 8% and are best alternatives to savings account interest
- You can also invest in Fixed Maturity Plan as an alternative to Fixed Deposits, we are going to see the differences between FMP and FD below in this article
How FMP works?
The working of FMP or Fixed Maturity plan is quite simple:
- NFO or new fund offering of FMP is offered by fund house during specific time frame
- You need to buy FMP in mutual fund during this time frame
- These funds invest in fixed maturity instruments like corporate bonds, commercial papers, certificate of deposits and sometimes fixed deposits as well in their portfolio
- The fund manager uses the buy and hold strategy in this FMP mutual fund, thus avoiding frequent buying and selling of instruments. This is the reason the expense ratio is low for Fixed Maturity Plan in mutual funds, compared to other debt funds
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Features of Fixed Maturity Plan
- Fixed Tenure: FMP have fixed tenure and tries to invest in debt instruments having similar maturity period with respect to fund itself
- Close Ended funds: These are close ended funds which means they are open for buying only during specific time frame
- Low Liquidity: Due to their low liquidity, you cannot redeem the mutual fund units before maturity period unlike fixed deposits, which can be considered as disadvantage of Fixed Maturity Plan mutual fund
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Fixed Maturity Plan Benefits
Below are some Benefits of Fixed Maturity Plan:
- Low Risk: Fixed Maturity Plan or FMP have low risk compared to other debt and equity mutual funds, since they invest in debt instruments like corporate bonds, commercial papers, certificate of deposits, etc.
- Fixed Tenure: FMP come with a fixed tenure like 3 years or 5 years, which helps to achieve your medium term financial goals. The strategy used here is to buy and hold the instruments to give you better returns compared savings account
- Better Returns: You get better returns compared to savings account and other liquid mutual funds. The returns are similar to fixed deposits
Fixed Maturity Plan vs Fixed Deposits
There are certain differences between Fixed Maturity Plan (FMP) and Fixed Deposits (FD):
- Liquidity: Fixed deposits are liquid in nature and can be broken before maturity period. While FMP cannot be withdrawn before maturity period.
- Taxation: Fixed deposits interest amount can be saved under Section 80TTB if you are a senior citizen, where as, the profits made with Fixed Maturity Plan follow the taxation similar to debt funds. Profits will be added to your income and taxed as per income tax slab rates
- Returns: The returns earned in fixed deposits are fixed and are mentioned in fixed deposit certificate, where as the returns from FMP are indicative and can be low or high compared to indicative returns mentioned, depending on the economic conditions
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Is Fixed Maturity Plan Safe?
Fixed Maturity Plan mutual funds are considered to be having low risk compared to other Debt mutual funds. Since these funds invest in debt instruments, the risk associated is very low as the companies rarely default on the interest payments.
But the returns mentioned in FMP are indicative and are not fixed in contrast to fixed deposits which have fixed returns.
So FMP or Fixed Maturity Plan in mutual fund are the type of mutual funds that invest in debt instruments to keep the risk low. They have fixed tenure of maturity which helps you to achieve medium term financial goals.
FMP can be best alternatives to fixed deposits and savings account as they provide indicative returns after maturity. These are close ended mutual funds which means they will be open for buying only during specific time frame and gets matured after the said period.
Usually the debt instruments also have maturity period similar to fund itself to avoid the impact of interest rate movements in market. FMP or Fixed Maturity Plan is best suited for conservative investors who want to park their idle money for better returns while keeping their risk low.
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- What is Income Mutual Funds
- Rs. 1000 Mutual Funds Returns for 15 Years
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Frequently Asked Questions
Is FMP better than FD?
FMP or Fixed Maturity Plan can be considered as one of the alternatives to FD or fixed deposits. FD have guaranteed returns whereas the returns from FMP are indicative and can be low or high based on the economic conditions and underlying debt instruments. FMP have low risk compared to FD which can be 100% safe.
Is FMP tax free?
No, the profits or dividends earned from FMP will be taxed as per the debt mutual funds taxation rules. The profits will be added to your income and taxed as per your income tax slab rates when mutual fund is have less than 35% equity exposure, which is the case in most debt funds.
What is the tax treatment of fixed maturity plan?
The profits earned in fixed maturity plan or FMP will be added to your income and taxed accordingly based on income tax slab rates, like other debt mutual funds. So FMP are not tax free.
What happens when FMP matures?
When FMP matures, you get your principal amount back along with the profits your earned over the fixed maturity period. The returns can be similar to the indicative returns that was mentioned while you bought FMP.
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