Deepshikha | Feb 12, 2022 |
Everything You Need To Know About Fixed Maturity Plans
FMPs (Defined Maturity Plans) are closed-end debt mutual funds having a fixed lock-in duration ranging from 30 days to 5 years. Fixed income securities, such as certificates of deposit, commercial papers, treasury bills, and bonds that lock in returns, are the primary investments of FMPs. The major goal of this strategy is to remove interest rate fluctuations in debt markets and give investors consistent returns over a set period.
Individuals can only invest in FMPs through subscription requests during the New Fund Offer (NFO) period. There is no way to invest in FMP after the NFO period has ended. Finally, investors can only redeem their investment at the end of the term. In addition, no early exit from the scheme is permitted. Furthermore, investors can only invest in these funds in a flat sum, not through a systematic investment plan (SIP).
FMPs are appropriate for investors with a low-risk tolerance who want a relatively safe investment vehicle that is less susceptible to market swings. Investors who prefer bank deposits can invest in higher-yielding FMPs. They are not, however, as secure as bank deposits. The Net Asset Value (NAV) of these funds fluctuates in response to interest rate changes and other economic factors. As a result, if investors want to diversify their investment portfolio, they can devote a percentage of their assets.
FMPs can be purchased by investors based on their investment horizon, financial objectives, and cash flow needs. Because the portfolio invests in securities with fixed maturity and yields, they can estimate the returns from these schemes. As a result, this can be a useful instrument for reducing the risk of stock market swings. Furthermore, keep in mind that their money will be locked up until maturity, with no way to get it out. Before investing, investors should be informed of the FMP’s tenure. The overall short-term capital gain is added to your total income and taxed at the slab rate.
The following are the key features of FMPs.
Investors that invest during the NFO period are unable to redeem their money before maturity because these plans have a defined lock-in term. This aids investors in estimating the potential returns on their investment. They can also plan their cash flow requirements based on their financial goals.
Investors in FMP can opt to invest only during the offer period, and redemption is only permitted at the maturity date. As a result, no additional investment is permitted after the offer time has ended. Investors who hold units in Demat form, on the other hand, have a choice. They can sell the units of a stock exchange-listed fixed maturity plan. This allows investors to exit the FMP plan before the end of its term.
Fixed maturity plans generally invest in debt securities such as commercial papers (CP), certificates of deposits (CD), money market instruments, corporate bonds, government bonds, and highly rated non-convertible debentures (NCD). The fund manager constructs a portfolio in which the securities’ maturities correspond to the fund’s.
FMPs are less susceptible to interest rate fluctuations because the fund retains the instruments until they mature, resulting in a reasonably stable interest rate. In addition, because interest rates are for a longer period, investing in FMPs is advantageous during a falling interest rate scenario.
Depending on the FMP’s composition, the portfolio may include debt and money market instruments to reduce the risk of default. However, this does not imply that you will be safe or have a low credit risk. As we saw a few years ago, the ratings of certain of the underlying instruments can alter over time.
The majority of FMPs have a three-year or longer maturity period. Long-term capital gains tax regulations apply in this situation, with indexation benefits added for these non-equity assets. Indexation reduces the overall tax liability by factoring inflation into the equation.
Fixed-maturity plans are subject to capital gains taxation. The tax rate is determined by the length of time the asset has been held. Long term capital gains apply if you retain your investment for more than 36 months from the date of purchase. Long-term capital gains are taxed at a flat rate of 20%, with the added benefit of indexation. You can alter the cost of investing through indexation. Your investment cost will grow as a result of indexation, resulting in tax savings. If you hold your investment for less than 36 months, you will have a short term capital gain.
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