Fixed Maturity Plan

Fixed maturity plans (FMP) are closed-end debt funds that aim at generating returns that are indicated at the time of launching the scheme. Mutual funds are not allowed to launch assured return schemes. FMPs, therefore, only indicate the likely returns. FMPs can generate predefined returns because of the way their portfolio is constructed. They invest in debt securities which mature around the tenor of the fund. Since the instruments are held to maturity, there is no risk of the value of the security being affected by interest rate movements and fund managers are able to give returns indicated at the time of investing.

FMPs come with various maturities. The popular tenors are of one month, three months and a little over a year. As closed-end funds, FMPs cannot accept any fresh investment once the NFO is over. To help investors deploy their available funds and reinvest money from maturing FMPs, mutual fund houses launch a continuous series of FMPs. The NFO is generally open for two to three days and the minimum investment is usually kept at Rs 5,000. Since investors cannot withdraw their money till the maturity of the scheme, they need to choose a fund with a tenor that matches their investment horizon.

Expense ratio. This varies from 0.25 to 1 per cent for FMPs. The prevalent yield minus the expense ratio can be considered as an indicative return from the FMP. The expense ratio is mentioned in the offer document.

Why FMP?
FMPs are similar to bank fixed deposits (FD) in features such as fixed tenor and indicative return. But they do not guarantee returns like FDs do. So, why should an investor choose an FMP over an FD? The answer lies in the tax efficiency that FMPs bring to their returns.

The example given in the table shows that while FMP attracts the dividend distribution tax (DDT), FD is subject to income tax. Since DDT is lower than the income tax rate, FMP gives a higher post-tax return than FD.

FMPs with maturities of greater than one year provide capital gains efficiency by structuring the tenor in such a way that investors benefit from double indexation. For example, by holding the FMP launched on 30 March 2008 for a little more than a year (370 days) till it matures on 4 April 2009, an investor gets to use the cost of inflation index applicable for the years 2007-2008 (year of purchase) and 2009-2010 (year of redemption). The tenor of the fund and the date on which it is launched allows double indexation, thus reducing the capital gains tax applicable on the returns.

FMPs suit investors who have a fixed investment horizon and would like to know the likely returns. The tax advantages make them superior to FDs. The only caveat is that investors need to evaluate the credit risk involved in the securities that the FMP is likely to invest in.






1 Dividend distribution tax
2 Assuming the FMP distributed the entire Rs 350 as dividend

Source : Outlook money