Less Known Advantages of a Fixed Maturity Plan

Every individual has their own financial goals. And, irrespective of the goals you have, you must understand that accomplishing these goals requires time and perseverance. It does not happen overnight and it requires carefully financial planning. While you plan your finances and investment, you must consider factors such as inflation and choose the right investment options accordingly.

Traditionally, most people preferred investing bank FDs, but day you have plenty of options. You can consider investing in different instruments and diversify your portfolio. If you are an amateur investor and are looking for a risk-averse investment opportunity, you can consider having debt funds such as fixed maturity plan or FMP in your portfolio.

What is fixed maturity plan?

FMPs are essentially closed-ended investment schemes that have a fixed maturity date that is defined at the time of investment. These plans invest in various debt-based instruments such as certificates of deposits, commercial papers, etc., based on the investment objective and asset allocation of the scheme.

Benefits of investing in FMPs

Generally, the fixed maturity plans have tenures of 90, 180, and 370 days. Some plans have a maturity period up to three years. If the maturity term of fixed maturity plan is more than 12 months, the fund manager invests the funds in various funds that matures within 12 months or before. This significantly helps in locking the portfolio returns and reducing the interest rate risk. Another significant benefit of investing in fixed maturity plans is that they offer high liquidity. The FMPs are listed on the stock exchange, where you can easily buy or sell the units.

Although since the introduction of the tax changes in the 2014 Union Budget, the popularity of FMPs has taken a nosedive, the long-term plans with an investment horizon of over three years, continue to attract several investors. Before the tax changes, the FMPs had a distinct advantage over the bank fixed deposits mainly because of the latter’s low tax rates.

However, the 2014 Union Budget increased the long-term capital gains (LTCG) tax on debt-oriented mutual funds from 10% to 20% with indexation. Also, the long-term debt mutual funds definition was revised from 36 months to 12 months. This revision affected the FMPs with duration less than three years.

Assuming the investors fall in the highest tax bracket of 30%, the STCG (Short-term capital gains) tax for FMPs less than three years is now 30% plus the applicable cess and surcharges. For FMPs greater than three years, LTCG is applicable at 20% plus the surcharge and cess. The FDs on the other hand, are taxed as per the individual tax bracket.

Important things to know before investing in FMPs

While there are plenty of benefits of investing in fixed maturity plans, you must be aware of certain important things, which are discussed below:

• The FMPs don’t offer guaranteed returns
• FMPs carry credit risk because of the possible of default of securities in the portfolio
• Although the FMPs are listed, they have low liquidity because of the low trading volume. The FDs have better liquidity since the financial institutions allow premature redemption, albeit the penalty charges.

Final Word

If you are an amateur investor, do your due diligence to understand the different aspects of the fixed maturity plans and carefully weight its pros and cons before investing. It is best advisable to consult a financial advisor before adding FMPs to your portfolio.