Fixed Maturity Plans (FMPs) of Mutual Funds

With rise in inflation, the interest rates offered by banks on deposits are also climbing.

This may look like a cozy picture for those who derive their income from fixed deposits as banks now offer more interest for the same amount, but what exactly is the Reality..?

Benefits of investing in Fixed Maturity Plans

Professional Management

The FMPs are able to invest in better fixed income products as compared to retail individuals because these mutual fund houses employs professionally skilled employees, 

Capital Protection

• Since they predominantly invest in AAA and other highly rated securities, the risk associated with an FMPs is very low.

Lower Cost

• Since the investment is held till maturity, there is a cost saving in respect of buying and selling of instruments. Therefore, their expense ratio is minimal.

Low interest rate sensitivity

• As these plans hold the securities till the time of maturity, the interest rate risk associated with them is almost not there.

Income Tax on Income earned from Investing in FMPs

• If a FMP held for less than 1 year,the gains are added to your income and taxed at your applicable income tax slab rate.

• In case the FMP is held for more than a year, Long Term Capital Gains (LTCG) tax is applicable. 

• The Investor has the option to choose the capital gains tax with or without indexation benefits. The income tax rates are:

• 10% without indexation benefit, or
• 20% with indexation benefits

Tax Planning Advice

• If you fall in the category of 20% / 30% income tax slab rate, opt for dividend option. This is because the dividend is tax free in your hands.

Risks associated with Investing in FMPs

Although FMPs have the potential to earn better than FDs, they are also exposed to some risks:

Credit Risk

• Although most FMPs invest in highly rated securities, they may sometimes invest in not so good instruments in order to earn a quick return on investment. 

• As per the SEBI guidelines, mutual funds cannot disclose the quality of instruments where they are investing and the indicative returns. 

• So...it is always advisable to check the credentials of the mutual fund houses before investing in any FMP.

 Liquidity Risk

• FMPs are not very liquid since these FMP invests in securities which is normally held till maturity once bought.

• So...if you want to exit before maturity, you may have to sell them at a discount. 

• Thus...for maximum benefits, it is highly advisable that an investor stays invested in the FMP till maturity.

I hope this article has shed some good light on Fixed maturity plans..!!

Share your views..they are highly appreciated.