Fixed Maturity Plans: Who Should Invest in FMP Mutual Funds?

8 min read • Published 20 October 2022
Written by Animesh Gupta
Know what types of investors should opt for fixed maturity plans 

FMP mutual funds are ideal if you are looking for an investment option with a fixed tenure. These close-ended debt funds ensure that you receive returns in line with the interest rates of underlying securities. This blog provides crucial details related to fixed maturity plans. Read on to learn more. 

What Is a Fixed Maturity Plan? 

FMP mutual funds are close-ended mutual fund schemes that primarily invest in fixed income instruments such as a certificate of deposit, treasury bills or bonds that lock in the currently available yields. This eliminates the interest rate fluctuation in debt markets and provides steady returns to investors. 

You can invest in these funds only during the New Fund Offer (NFO) period through subscription requests. Once the fund reaches the maturity date, you can easily redeem your investments at the current NAV (Net Asset Value). 

How Do FMP Mutual Funds Work? 

The portfolio of an FMP mutual fund consists of different fixed-income instruments with similar maturities that also align with the fund’s maturity period. For instance, if the tenure of the mutual fund scheme is one year, then the fund manager will choose debt securities that mature within a year. This tenure generally varies from 30 days to 5 years. 

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money-market instruments, and non-convertible debentures.

Features of FMP Fund 

  • Since FMPs are closed-end funds, they can only be traded on the stock exchange where they are listed. If an individual wishes to liquidate, they must have a Demat account. However, trading of these funds is quite low.
  • Owing to the pre-defined maturity and locked-in yields of the underlying securities, you will have an estimate of the returns you will receive from the FMP, as mentioned in the NFO stage.
  • If you are holding these FMPs for more than 3 years, you can get indexation benefits on returns from FMP mutual funds. This allows you to adjust its cost against losses from inflation and results in lower taxation as compared to FDs in a Bank. 
  • FMP mutual fund schemes are subject to low-interest rate sensitivity. In other words, investors can lock in their interest rates for an extended period. This is especially helpful when there is a fall in interest rates.
  • Depending on the nature of the FMP, the debt instruments and money market instruments in the fund aims to minimise the risk of default. However, this does not guarantee absolute safety or zero risk. 

Who Should Invest in FMP Mutual Funds? 

  • If an investor is comfortable with locking-in his funds for a fixed tenure, they can invest in fixed maturity plans. 
  • If an investor has a low-risk tolerance level and is looking for a relatively secure investment tool that is less sensitive to interest-rate fluctuations.

Benefits of Investing in FMP 

  • Low cost

FMPs have a lower expense ratio than many other mutual fund schemes. Further, because of limited buying and selling of securities they have lower turnover costs which results in lower management and operating costs. 

  • Minimal interest rate risk 

In FMPs, fund managers hold the debt instruments till their maturity. So, fixed maturity plans have very low exposure to interest rate risk. Additionally, a fixed maturity plan invests in securities with high credit quality. 

  • Security

FMP mutual funds have the same security as debt instruments. Financial experts consider debt securities to be more secure and stable than equities. Hence, fixed maturity plans are an ideal investment option for people who want to secure their principal investment and get stable returns. 

  • Tax efficiency

Fixed maturity plans are more tax efficient than fixed deposits of banks and similar debt instruments. This is because when an individual invests in FDs, their income is fully taxed at the applicable tax slab rates. For long-term investments in FMPs, indexation benefits are applicable, which reduces the tax liability.

Risks Associated with FMP Investments 

FMP investments are primarily subject to credit risks and interest rate risks. 

  • Credit risks 

Credit risk refers to the risk of the issuers of the securities not being able to make coupon payments and returning principal to investors.
If there is a fall in the credit ratings of the issuer that may lead to a fall in the prices of securities. This is because investors may demand a higher risk premium on the asset. Moreover, the fund manager might have to liquidate securities if it falls below a specified limit of the rating levels. This will make the fixed maturity plan suffer capital losses. 

  • Interest rate risk

The design and composition of fixed maturity plans are such that it protects investors’ income from interest rate risks. When a plan is launched, collecting the money for investment takes time. However, interest rates can fall before the fund manager can invest the accumulated money. A situation like this will leave the fund manager with no other option but to invest the money at a lower interest rate. 

  • Liquidity risk

Since, the FMPs are close ended mutual funds, the liquidity in this segment is lower as compared to the open ended mutual funds where you can redeem anytime by paying the exit load if any. Liquidity in case of FMPs is only provided by the exchange where it is listed and it is generally low in case of FMPs.

Taxation of Fixed Maturity Plans 

FMP mutual funds are taxed just like any other debt funds. 

  • If the holding period of investments is less than three years, STCG (Short Term Capital Gains) tax is levied. These gains are added to the income of the investor and tax is levied as per the investor’s income tax slab rate.
  • However, if an investor holds an FMP investment for more than three years, Long Term Capital Gains (LTCG) taxes are applicable to it. The applicable tax rate for LTCGs is 20% after indexation. 

With indexation, an investor’s capital gains are calculated after losses from inflation are offset. This allows an investor to receive superior returns against a fixed deposit of the same tenure.

List of the Top Fixed Maturity Plans in 2022 

The table below lists the top FMPs in India in 2022 based on three-year annualised returns: 

Name of Fixed Maturity Plan 3-Year Annualised Returns 
SBI Fixed Maturity Plan (FMP) – Series 6 – Direct Plan – Growth5.84%
ICICI Prudential FMP – Series 85 – 10 Years Plan I – Direct Plan – Growth6.19%
Nippon India Fixed Horizon Fund XLI – Series 8 – Direct Plan – Growth6.10%
ICICI Prudential FMP-Series 83-1735 Days Plan P-Direct Plan-Growth 6.96%
SBI Debt Fund Series C-48-Direct Plan-Growth 6.79%
SBI Debt Fund Series C-48-Direct Plan-Growth 6.79% 
SBI Debt Fund Series C-44-Direct Plan-Growth 6.74%
SBI Debt Fund Series C-44-Direct Plan-Growth 6.74% 
SBI Fixed Maturity Plan (FMP)-Series 15-Direct Plan-Growth 6.84% 
*Returns data valid as of October 17, 2022

Final Word 

This blog has summed up all the important details regarding FMP mutual funds. It is a close-ended mutual fund that invests in debt instruments and has a fixed maturity date. 

FAQs about FMP Mutual Funds

What are the limitations of a Fixed Maturity Plan?  

The limitations of an FMP mutual fund are discussed below:
1. Limited liquidity: These funds offer low liquidity options to investors. This is because, once people invest in these funds, they cannot redeem the units before maturity.
2. No guaranteed returns: Locked-in returns and high-quality investments lower risks but don’t remove them altogether. FMP funds cannot guarantee returns. 
3. Locked-in rates: This can result in missed opportunities to leverage the rise of interest rates. 

Which is better – FMP or FD?

While FDs of banks have been a popular investment option among Indians, their returns fail to overtake inflation after tax adjustment. In such a scenario, fixed maturity plans are a more viable option. This is because FMP mutual funds have the potential to generate returns of 6-7% annually. However, FDs offer guaranteed returns and are considered safer investments. 

Are Fixed Maturity Plans liquid? 

No, fixed maturity plans are not highly liquid investments. This is because the only way to exit such investments is to trade units of these funds on the stock exchanges. Moreover, their trading volume tends to be low.

Where do FMP mutual funds mainly invest? 

FMP mutual funds invest in fixed-income bearing securities with the same maturity date as the scheme. Examples of these fixed-income securities include debt funds, corporate bonds, money market instruments, certificates of deposit, commercial papers and fixed deposits at banks.

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Animesh Gupta

Credit Principal
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 5+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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