Fixed Maturity Plans are often regarded as the Mutual Fund industry’s version of Fixed Deposits. But, should they find a place in your investment portfolio? Let’s find out here.
The markets might be going through their regular share of ups and downs, but with time, investor appetite is growing. Investors today are placing increasing importance on diversified investments and want to explore newer avenues of investment and savings.
The introduction of the LTCG tax may have taken the shine off of Equity Mutual Funds, but this hasn’t deterred first-time investors from giving it a shot. Fixed maturity plans are popularly known as the Mutual Fund’s industry version of Fixed Deposits. Veteran investors are sometimes known to do away with Fixed Deposits and opt instead for Fixed Maturity Plans.
Let’s find out what makes these Fixed Maturity Plans so popular.
What are Fixed Maturity Plans?
Fixed Maturity Plans are close-ended debt funds whose maturity period could range from one month to five years. One can make investments in them only during the new fund offer period. They invest in debt instruments issued by corporates and their investments have a maturity that coincides with the maturity of the Fixed Maturity Plan. Hence the name Fixed Maturity Plans.
These are primarily debt-oriented, and their objective is to provide steady returns over a fixed maturity period, thereby protecting investors from market vagaries.
Additional reading: Fixed Deposit Interest Rates Offered By Different Banks
How do Fixed Maturity Plans work?
A Fixed Maturity Plan portfolio consists of various fixed income instruments that have the same maturity. Based on the tenure of the Fixed Maturity Plan, a fund manager invests in instruments in such a way that all of them mature around the same time.
During the tenure of the plan, all units of the plan are held until they mature on a certain date. This way, investors get an indicative rate of return of the plan.
Where do Fixed Maturity Plans invest?
Contrary to popular perception, fixed maturity plans do not invest in equities. They usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments and highly rated securities (like ‘AAA’ rated corporate bonds) over a defined investment tenure. Sometimes they also invest in bank fixed deposits.
Additional reading: How To Switch From Fixed Deposits To Debt Mutual Funds
Taxation:
Fixed maturity plans differ from Fixed Deposits in tax treatment of income. In Fixed Deposits, the interest income is added to the investor’s income and gets taxed according to the applicable tax slab, also known as the marginal rate of tax.
With Fixed Maturity Plans, the tax implication depends upon the investment option – dividend or growth. With the dividend option, investors have to bear the dividend distribution tax (DDT). With the growth option, returns are treated as capital gains (short-term or long-term depending on the investment tenure). In case of short-term capital gains (i.e. if investments are held for less than 3 years), the interest income is added to the investor’s income and is taxed at the marginal rate of tax.
Coming to long-term capital gains (i.e. if investments are held for more than 3 years), the tax liability will be 20% with indexation.
With the indexation benefit, Fixed Maturity Plans end up delivering more tax-efficient returns than Fixed Deposits.
Additional reading: Everything You Need To Know About Fixed Deposits
Liquidity:
Fixed Deposits score over fixed maturity plans in liquidity. Being fixed income in nature, there are restrictions on liquidity in both cases. But Fixed Deposits can generally be withdrawn without penalty, unlike Fixed Maturity Plans.
Since Fixed Maturity Plans are close-ended funds, they can only be traded on the stock exchange, where they are listed. Trading in these units is however negligible, which makes Fixed Maturity Plans illiquid. Compared to this, open-ended debt funds can be bought or sold on a daily basis.
Who should invest in Fixed Maturity Plans (FMPs)?
Fixed Maturity Plans are low-risk, low-return investments compared to equity funds but are riskier than Fixed Deposits. The value of one’s Fixed Maturity Plan is reflected by the fund Net Asset Value (NAV). However, the NAV of the fund fluctuates every day as it is influenced by the interest rate movements in the economy.
Fixed Maturity Plans are ideal for those investors who need returns higher than a regular Fixed Deposit but are comfortable with frequent NAV fluctuations. While Fixed Deposits offer assured returns, Fixed Maturity Plans indicate a probable return.
Difference between Fixed Deposits and Fixed Maturity Plans at a glance:
Despite the differences highlighted above between Fixed Deposits and Fixed Maturity Plans, there are some obvious similarities between both. Both require one to stay invested for a fixed duration and are available in varying maturities to suit one’s convenience. However, there is also a stark contrast between both. Let’s take a look at them here:
| Points of difference | Fixed Deposits | Fixed Maturity Plans |
| Returns | Interest income is added to your annual income and taxed as per the applicable | 1. In FMP-Dividend-a Dividend Distribution Tax [DDT] is levied 2. In FMP-Growth-Capital gains tax apply |
| Maturity period | Varying maturity period options | Varying maturity period options |
| Liquidity | Ease of premature redemption, higher liquidity | Restricted liquidity |
Additional Reading: Different Types Of Investment Risks And How To Avoid Them
For risk-averse investors who are wary of risks associated with Fixed Maturity Plans, Fixed Deposits can be a great long-term savings and investment option that offers assured returns.
Not sure about the interest rates? On BankBazaar, you can search, compare and buy Fixed Deposits with the best interest rates!