Understanding what is Fixed Maturity Plan & what are the benefits of FMP?

POSTED BY manish ON August 22, 2008 COMMENTS (23)

Attaining financial goals is does not happen overnight, it needs a long term investment. But in case of Stock market, lot of people avoid a long term investment because of the fear of volatility of the returns.

Fixed Maturity Plan is the better option for such investors because of its higher security concerns. Let me explain you a bit detail about FMP.

Fixed Maturity Plan (FMP)

What is FMP?

Fixed Maturity Plans are the equivalent of a fixed deposit in a bank, with a little difference. The FMP’s returns are only indicated and not ‘guaranteed’, Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.

Fixed Maturity Plans are debt schemes, where the corpus is invested in fixed-income securities.

Where do FMP’s invest?

FMPs usually invest in certificate of deposits (CDs), commercial papers (CPs>), money market instruments, corporate bonds and sometimes even in bank fixed deposits.

Depending on the tenure of the Fixed Maturity Plan, the fund manager invests in a combination of the above-mentioned instruments of similar maturity. Say if the FMP is for a year, then the fund manager invests in paper maturing in one year.

The expense ratio, generally varies from 0.25 to 1 per cent.

Tenure of Fixed Maturity Plan

The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.

These FMP NFOs are generally open for 2 to 3 days and are marketed to corporates and well-heeled, high net-worth individuals. Nevertheless, the minimum investment is usually Rs 5,000 and so a retail investor can comfortably invest too.

Benefits of Fixed Maturity Plan:

1. Minimal risk – Fixed Maturity Plan’s are hold by fund manager till maturity which helps in getting fixed returns. Because of this FMP’s exposed least to the interest risks.

2. Protection from capital loss – FMPS’s invest in debt funds and this reduces the loss of capital relatively than that of equity funds.

3. Liquidity – Normally it is suggested to hold the Fixed Maturity Plan’s till its maturity, but if you want an exit then you will have that option and can exit from the FMP at any point.

What is the difference between FMP and FD?

FMP are differentiated form FD on the basis of some major key points like interest, returns, tax and indexation. As a debt fund, FMP enjoys the benefit of indexation on a long tern investment for more than 1 year.

FD is a risk free investment tool whereas FMP’s are risky because of the corporate debt default. Besides this, the returns from FD are fixed, but in case of FMP, the returns are only indicative and not fixed.

You can watch this video given below to know more about how FMP’s are different from FD’s.

Actual return Vs Indicated Return

The actual return can vary slightly, if at all, from the indicated return. Against that, a bank fixed deposit exactly prints the amount which is due to you on maturity on the FD receipt. However, FMPs do earn better returns than fixed deposits of similar tenure.

Have a look at the list of closed ended FMP’s , and there returns : https://www.personalfn.com/research-it/mutual-funds/fundarena/SchTypNat.asp

Tax Implication

1. Dividend :

Tax-free in the hands of the individual investor.

2. Investment in growth option of the FMP for less than a year :

The gains are added to the investor’s income and taxed at the investor’s slab rate.

3. Investment in the growth option of the FMP for over a year :

Either 10% capital gains tax without indexation or 20% with indexation.

What is indexation benefit?

The finance minister has been generous enough to recognize that inflation erodes the real value of any investment. So every year, he comes out with an inflation index based on the prevailing rate of inflation.

The cost of investment is indexed by multiplying the index of the year of maturity and divided by the inflation index prevailing on the year of investment. If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent.

To understand more on indexation, Read this

Conclusion

FMP’s are investment options for sure if you want to park your money for short term. They are more tax efficient and give better post-tax returns. Though returns are not 100% guaranteed , they are almost risk free (remember almost) .

If they really give better than returns then FD’s and practically as safe as FD’s why don’t people invest in these ?

Ans : No awareness among people and they less risk taking attitude

If you have question or any doubt related to FMP, you can leave your query in the comment section.

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23 replies on this article “Understanding what is Fixed Maturity Plan & what are the benefits of FMP?”

  1. Nikhil says:

    How to invest in FMP ?? After maturity investor has to go to AMC for redemption?? whats is the procedure of redemption??

    1. When you fill up the form , there will be the details about redemption. And anywyas you need Demat account for that

  2. uma says:

    Thanks for a valuable information regarding indexation.

  3. Chandresh says:

    Dear sir,

    I am new in FMP. Is it possible if i have invested 5000/- and fund manager faces loss in investment then will I get my same invested amount(5000/-) or less amount (< 5000/-) on maturity.

    Please replay!!!

    1. That shows you do not understand mutual funds. Its a risky investment, you will get whatever is market value !

  4. Indu says:

    Hello Manish,
    Could you pls tell me which is a better instrument for investment… a corporate bond or an FMP?
    Also in case of corporate bonds.. which is better – one bought in the secondary market or one bought when issued.
    Thanks.

    1. It will depend on your situation .. what are your goals ?

      1. Indu says:

        By goals you mean?
        I am looking for a long term safe instrument for savings that would yield a better return than an FD.

          1. Indu says:

            If you dont mind could you please explain the reasons behind this suggestion.

          2. pckanal says:

            for last few years, rules were amended whereby entire amount upto Rs. Oone Lac (Savings permitted U/S 80 C ) can be invested in PPF as against earlier provision of Rs.70,000/-.
            Could you please clarify whether interest on enhanced amount of RRs.30,000/- (under revised rules) is also Tax Free ?

            1. gopal says:

              I WANT TO INVEST/KNOW ABOUT RISK FREE HIGH YIELDING INSTITUTIONS/BANKS ETCs

            2. There is none . If its risk free, the return would be very normal like FD

  5. Very informative and useful for Income Tax payers.

  6. rohit says:

    hi manish
    from where retail investor get FMP, are banks also providing ? which bank and how do we know that nfo fmp is open when?

    1. FMP are same as mutual funfds ,you get it from agents , demat account or directly from AMC

  7. Abhigyan says:

    Hi Manish,
    Please give some scheme names which provide FMPs.

    Abhigyan

    1. Abhigyan

      FMP’s are themselves schemes ! . you can search value research to get FMP names : http://www.valueresearchonline.com/funds/h2_typecomp.asp?mode=performancelong&Type=1&objective=7

      Manish

  8. Balbir says:

    Hi Manish,

    As you mentioned “If you have arrived at an indexed cost, then the long-term capital gain is taxed at 22.44 per cent and if you do not opt for the indexed cost, then the tax is 11.22 per cent. ”

    Can you please give one example that how 22.33% with indexation would be better in long term instead of 11.22% without indexation.

    Thanks in advance,
    Balbir

    1. Balbir

      Lets take an example of a person who bought a flat in 2005 at Rs 40 lacs and the prices went to 50 lacs in 2007 , then Rs 60 lacs in 2008 and then crashed in real estate downturn and finall was Rs 50 lacs in 2009 , the person needed money and sold his flat at 50 lacs . So buy price 40 lacs in 2005-2006 (CPI=497) and sell price Rs 2008-2009 (CPI=582 )

      Indexed Cost price = 50 lacs * 582/497 = 5855130
      Sell price = 60 lacs

      Tax @22.33% if indexation = 22.33% of (60,00,000 – 58,55,130) = 32,349
      Tax @11.22% without indexation = 11.22% of (60 lacs – 50 lacs) = 1.12 lacs

      Manish

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