A fixed maturity plan (FMP) is a closed-ended debt mutual fund scheme, wherein the duration of debt papers is aligned with the tenure of the scheme.

1. MONTHLY PRODUCT REVIEW
From the Research Desk @ FinEdge
In a nutshell
A fixed maturity plan (FMP) is a closed-ended debt
mutual fund scheme, wherein the duration of debt
papers is aligned with the tenure of the scheme. So a
one-year FMP will invest in debt instruments that
mature in one year or just before this period. This
synchronized maturing completely eliminates the
interest rate or reinvestment risk. Basically, your
returns will remain unaffected even if the RBI chooses
to raise benchmark interest rates (thereby lowering
bond prices in the debt market)
Where will FMP’s invest my hard earned money?
FMPs invest largely in certificates of deposit (CDs),
commercial papers (CPs),moneymarketinstruments,
corporate bonds, even in bank fixed deposits. The
yield of these wholesale debtpapers is slightly higher
than that of the retail FD rates.
What is the return one can expect from FMP’s?
Presently, one can expect between 8.5 to 9% (post
tax), although returns aren’t guaranteed.
Can I encashmy FMP before maturity?
No. FMP’s are close ended and cannot be encashed
before their maturity date. They automatically mature
on a fixed date and the proceeds are credited to your
account through ECS or a cheque is sent to you (if
you haven’t registered for the direct credit option)
What about taxation on FMP’s?
FMP’s are taxed as regular debt funds. Short term
Capital Gains (returns earned before 1 year) are
taxed as regular income. Returns earned after one
year are taxed at 10% without indexation or 20% with
indexation (whichever is lower)
What is this ‘double indexation’ I keep hearing
about?
Double indexation allows you to increase the
purchase price of your units by the combined inflation
rate of two or more years while computing capital gain
tax on your FMP returns. Obviously, this will
drastically decrease your tax liability on FMP returns.
Double indexation is possible if the duration of your
FMP is spread across more than one Financial Year.
Is an FMP 100% risk free?
Though the FMPs are relatively less risky, investors
should not treat these zero risk investments. While
the structure eliminates interestrate and reinvestment
risk, the credit risk (or the default risk) still exists.
Since fund houses are not allowed to give 'indicative
portfolios', there is no mechanism to make sure that
the moneywill be invested only in high quality papers !
So one should only opt for FMP’s that are being
offered by reputed fund houses.
How will the Direct Tax Code (DTC) affect FMP’s?
FMP’s will lose part of their sheen when DTC is
implemented. Under the DTC, for an investment to
qualify for long-term capital gains,the asset has to be
held for at least one year from the end of the financial
year in which it was bought. Many 370 day FMP’s will
lose their double indexation benefit as a result.
The bottom line: Is it for me?
We consider FMP’s to be a superior alternative to
Bank Fixed Deposits, which offer more liquidity but
generally provide a post tax return that is 2-3% lower.
If you are a low risk investor or a retired person who
prefers semi - fixed returns with minimal volatility,
FMP’s are for you. Younger/ more aggressive
investors will be better off including a higher
proportion of equities in their portfolios, in order to
benefit from compounding and long term growth.
However, FMP’s can still form upto 20% of their
overall asset allocation.
I want to invest in an FMP. What now?
Contact your Financial Planning Manager or get in
touch on the contact details mentioned below!
@ servicedesk@finedge.in/ CALL:(011) 4507 2643
DISCLAIMER: A FinEdge Knowledge Report. The information contained within this report is for the information of
prospective and existing clients of FinEdge Advisory Private Limited. It is not intended as an offer or solicitation to buy or
sell investments. The information provided is believed to be correct and, where applicable, was obtained from sources
believed to be reliable, but accuracy or completeness cannotbe guaranteed.