Sharekhan Blog

Fixed Maturity Plans: A Comprehensive Guide

  • Apr 18, 2024

Fixed Maturity Plans (FMPs) allocate investments into debt and money market instruments with predetermined maturities. This strategy involves purchasing securities with the intention of holding them until maturity, effectively mitigating interest rate risk.

For investors seeking a diversified portfolio, FMPs offer an attractive blend of capital appreciation and stability. Furthermore, they are ideal for those interested in debt products while managing interest rate risk.

For risk-averse investors, FMPs serve as an excellent option due to their ability to provide predictable returns. In this post, we will delve into the intricacies of FMPs, elucidating why they represent a prudent choice for investment portfolios.

What is a Fixed Maturity Plan (FMP)?

A Fixed Maturity Plan (FMP) is a closed-ended debt fund that invests largely in debt-based securities with maturities that match the scheme's lock-in tenure, such as corporate debt instruments, treasury bills, certificates of deposit, etc.

During the NFO (New Fund Offer), the window for FMP investments is only open for a brief period of time; after that, no new investors or traders will be able to buy fund units from the AMC. Moreover, closed-ended plans like FMPs, however, ought to be obliged to be listed on stock exchanges in accordance with SEBI regulations in order to give investors the option of an early exit if necessary.

Benefits of Fixed Maturity Plans

Investing in stocks can be a great way to get wealthy and become financially independent. Choosing which stocks to buy might be difficult with so many possibilities available. These are seven good reasons to think about investing in stocks and why it's a wise decision.

1.Diversification

Stock investments might contribute to portfolio diversification for the best fixed maturity plans. You can lower the chances of losing money on a single stock's performance by distributing your investments among several stocks. Investing in a variety of companies can also enable you to benefit from economic cycles and market movements.

2. Compound Interest

Compound interest, or interest earned, is a benefit that comes with investing in stocks. Your FMP investment may rise significantly as a result of this over time.

3.Potential For High Returns

A primary reason for investing in equities is the possibility of achieving substantial returns. Even though they can be volatile, stocks have traditionally outperformed other investing options like bonds and savings accounts in the long run.

4. Potential To Participate In The Growth Of Organisations

You might potentially participate in a company's growth and profit from its success by investing in stocks. For instance, if a business does well, its stock price can rise, which would improve your return as an investor.

5. Liquidity

Stock investing provides a high level of liquidity. This implies that when you need the money, you can easily sell your stocks, as opposed to other FMP investments like real estate, which can take longer to sell.

6.Indexation Benefit

Debt mutual fund investments, such as FMPs that are redeemed three years after the original investment date, are subject to 20% Long-Term Capital Gains tax, although they also benefit from indexation.

This feature enables investors to modify the fund's purchase NAV in accordance with the rate of inflation in the nation. However, the indexation advantage may lower your tax obligation.

Which Class of Investor Should Invest in FMPS?

If you are willing to commit your money for a predetermined amount of time and don't require intermediate liquidity, you ought to invest in an FMP. That's what makes you a fit for FMP.

1.You can choose a 6-month FMP if you can lock in your money for that long. Likewise, choose a three-year FMP if you are able to lock in your assets for that length of time.

2. Recall that there is very little interest rate risk once money is locked into a fixed-rate plan. You ought to profit to the extent that the securities with comparable maturities allow.

3. On the stock exchange, FMPs are traded and listed. Still, trade is frequently quite small, and pricing might not be indicative of the market. Never depend on liquidity from the secondary market.

4. Simply put, FMPs are a type of closed-ended debt fund that matches the maturity length of the fund with the fund holding profile to produce indicative returns.

The Bottom Line

If you're searching for high returns and tax advantages, FMPs are excellent investment options. Only following the term, the closed-ended plans are redeemable. Therefore, all of the capital and interest are credited back to the investors after the term has ended. Your investment choice selection will determine how much you are taxed in FMPs. Growth or dividends could be included here. As a result, FMP is the best choice for investors looking to generate steady returns from debt investments.

Team Sharekhan
by Team Sharekhan

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