Fixed Maturity Plans
Fixed Maturity Plans (FMPs) are specialised products within mutual funds that produce predictability and stability in returns. For conservative investors seeking a time-bound investment with the least exposure to market volatility, FMP is an apt choice. This article deals with the details of FMPs: definition, functioning mechanics, types, investment goals, and some frequently asked questions.
Table of Contents
What is Fixed Maturity Plan?
The Fixed Maturity Plan, or FMP, is a debt mutual fund that typically invests in fixed-income instruments with a specific maturity date. While one could enter or leave an open-ended mutual fund at any given time, FMPs have a tenure of just a few months or even years. It is a practice to match the maturity of the underlying securities to the investment horizon for stable and predictable returns.
FMP’s prime purpose is to offer systematic returns through investment in close to risk-free instruments like corporate bonds, government securities, certificates of deposit, and money market instruments. When the portfolio’s maturity date is aligned with the declared tenure of the FMP, the dangers of rate hikes are reduced.
Understanding Fixed Maturity Plans
FMPs operate under other rules and are exclusive from other categories of mutual funds:
- Close-Ended Structure: The investor can subscribe to an FMP only during the NFO period. Once that subscription window closes, no further investments are accepted until the fund matures.
- Well-defined Maturity Horizon: The securities chosen inside the FMP portfolio mature on or before the fund’s maturity date. The strategy adopted aligns their maturity with the fund’s maturity period, which thereby reduces interest rate risks and clearly forms a perception of return for the investors.
- Tax Efficiency: Funds held for more than three years enjoy long-term capital gains tax treatment, which makes them more tax efficient than traditional savings products.
- Market Liquidity: Though the FMPs are traded in the stock exchanges, liquidity is usually low. Investors should stay invested for the full term.
Types of Fixed Maturity Plans
FMPs can be classified as follows: Tenure, Investment Focus and Risk Profile;
- By Tenure:
- Short-Term FMPs: Less than one year.
- Medium-Term FMPs: One to three years
- Long-Term FMPs: More than three years
- Based on Investment Orientation
- Government Securities FMPs: Invest in low-risk government securities
- Corporate Bond FMPs: Invest in high-yielding corporate debt and lower-rated credit instruments
- Based on the Risk Profile
- Low-Risk FMPs: Invest in high-rated securities
- Moderate-Risk FMPs: Invest in lower-rated bond portfolios to increase the potential yields that can be attractive to a risk-taking individual
Investment Objective of FMPs
The primary investment objective of Fixed Maturity Plans is predictable returns and risk minimisation. They can cater to the requirements of several classes of investors in three ways.
- Capital Preservation: FMPs are focused on capital protection, which is in line with the priority for high-quality fixed-income securities.
- Predictable Returns: The well-defined maturity structure and locked-in yields come with predictable returns.
- Tax Efficiency: It is especially optimally structured to deliver higher post-tax returns vis-à-vis the traditional fixed deposits for all investments above a certain time limit.
Examples of Fixed Maturity Plans
To show how versatile FMPs can be, here are some examples in other global markets:
- Aberdeen Standard Investments Emerging Markets Bond Fixed Maturity Fund 2023: This fund for high net-worth individuals who get stable returns from emerging market bonds. The maturity product matches the fund’s objectives, such as capital protection and income generation.
- Hang Seng Asia Bond Fixed Term Fund 2022: It invests in Asian debt securities in USD. This type of FMP attracts investors with geographical diversification and stability within a fixed timeframe.
These above examples show the flexibility of FMPs that cater to the goals of many investors in predictable and stable terms.
Frequently Asked Questions
Investors will enjoy numerous benefits when investing in Fixed Maturity Plans:
- Fixed Returns: Since the plan is fixed maturity and yield-locked, this removes market risks and ensures stable returns during the investment period.
- Tax Effectiveness: Indexation for long-term investors reduces tax liabilities on inflation-indexed returns.
- Portfolio Diversification: Generally, the portfolios of FMPs are diversified over various fixed-income instruments. This adds stability to a portfolio
FMPs collect investor funds during the NFO period and then invest them in a predetermined portfolio of fixed-income securities. The fund manager ensures that all the instruments mature on or before the fund’s maturity date, thus setting a portfolio that is aligned with the established investment horizon. All the returns realised at maturity are paid out to investors.
Though FMPs are considered to be relatively risk-free, they can never be risk-free:
- Credit Risk: Returns may face the risk of issuer default.
- Liquidity Risk: The close-ended nature precludes early redemptions, and there may be a problem relating to secondary market liquidity.
- Market Risk: Although interest rate risk does not directly threaten return for investors with a maturity date, rate changes may influence the early resale of FMPs in the secondary market.
Although FMPs and fixed deposits (FDs) seem to offer stable returns, they vary sharply:
- Tenure Choice: FMPs have a tenure determined during the NFO period. FDs are flexible with their tenures.
- Return Predictability: FMPs offer an indicative return against the underlying portfolio; FDs assure interest rates.
- Liquidity: FDs have easier premature withdrawal, but FMPs provide limited liquidity with exchange traded.
- Taxation: Indexation benefits long-term FMPs, hence making them more tax-effective than FDs in many cases.
FMPs are best suited for:
- Conservative Investors: Those looking for stability and predictable returns.
- Tax-conscious investor: Investors with a focus on tax-effective returns.
- goal-oriented Investor: People align their investments with specific financial milestones.
However, investors seeking liquidity or high growth potential through equities may prefer something other than FMPs.
Related Terms
- Enhanced Index Fund
- No-Load Fund
- Back-End Load Funds
- Appreciation Funds
- International Value Funds
- Small-Cap Value Funds
- Debt Funds
- Pension Funds
- Broad Market Index Funds
- Mid-cap value funds
- Large Cap Value Funds
- Sector Specific Value Funds
- Ultra-Short Bond Funds
- Sub-Advised Fund
- Provident Fund
- Enhanced Index Fund
- No-Load Fund
- Back-End Load Funds
- Appreciation Funds
- International Value Funds
- Small-Cap Value Funds
- Debt Funds
- Pension Funds
- Broad Market Index Funds
- Mid-cap value funds
- Large Cap Value Funds
- Sector Specific Value Funds
- Ultra-Short Bond Funds
- Sub-Advised Fund
- Provident Fund
- Sovereign Wealth Funds
- Management Fees
- Clone Funds
- Net asset value per unit
- Closed-End Funds
- Prime Money Market Fund
- Tax-Exempt Money Market Fund
- Value Fund
- Load Fund
- Fund Family
- Venture Capital Fund
- Blue Chip Fund
- Back-end loading
- Income fund
- Stock Fund
- Specialty Fund
- Series fund
- Sector fund
- Prime rate fund
- Margin call
- Settlement currency
- Federal funds rate
- Sovereign Wealth Fund
- New fund offer
- Commingled funds
- Taft-Hartley funds
- Umbrella Funds
- Late-stage funding
- Short-term fund
- Regional Fund
- In-house Funds
- Redemption Price
- Index Fund
- Fund Domicile
- Net Fund Assets
- Forward Pricing
- Mutual Funds Distributor
- International fund
- Balanced Mutual Fund
- Value stock fund
- Liquid funds
- Focused Fund
- Dynamic bond funds
- Global fund
- Close-ended schemes
- Feeder funds
- Passive funds
- Gilt funds
- Balanced funds
- Tracker fund
- Actively managed fund
- Endowment Fund
- Target-date fund
- Lifecycle funds
- Hedge Funds
- Trust fund
- Recovering funds
- Sector funds
- Open-ended funds
- Arbitrage funds
- Term Fed funds
- Value-style funds
- Thematic funds
- Growth-style funds
- Equity fund
- Capital preservation fund
Most Popular Terms
Other Terms
- Free-Float Methodology
- Foreign Direct Investment (FDI)
- Floating Dividend Rate
- Flight to Quality
- Real Return
- Protective Put
- Perpetual Bond
- Option Adjusted Spread (OAS)
- Non-Diversifiable Risk
- Merger Arbitrage
- Liability-Driven Investment (LDI)
- Income Bonds
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Equity Carve-Outs
- Free-Float Methodology
- Foreign Direct Investment (FDI)
- Floating Dividend Rate
- Flight to Quality
- Real Return
- Protective Put
- Perpetual Bond
- Option Adjusted Spread (OAS)
- Non-Diversifiable Risk
- Merger Arbitrage
- Liability-Driven Investment (LDI)
- Income Bonds
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Equity Carve-Outs
- Cost of Equity
- Cost Basis
- Deferred Annuity
- Cash-on-Cash Return
- Earning Surprise
- Capital Adequacy Ratio (CAR)
- Bubble
- Beta Risk
- Bear Spread
- Asset Play
- Accrued Market Discount
- Ladder Strategy
- Junk Status
- Intrinsic Value of Stock
- Interest-Only Bonds (IO)
- Interest Coverage Ratio
- Inflation Hedge
- Industry Groups
- Incremental Yield
- Industrial Bonds
- Income Statement
- Holding Period Return
- Historical Volatility (HV)
- Hedge Effectiveness
- Flat Yield Curve
- Fallen Angel
- Exotic Options
- Execution Risk
- Exchange-Traded Notes
- Event-Driven Strategy
- Eurodollar Bonds
- Embedded Options
- EBITDA Margin
- Dynamic Asset Allocation
- Dual-Currency Bond
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