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Fixed Maturity Plans – Basics, Taxation & Benefits of Fixed Maturity Plans

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All about Fixed Maturity Plans – Basics, Taxation & Benefits of Fixed Maturity Plans

Fixed Maturity Plans are close-ended debt mutual fund schemes that eliminate interest rate risk and lock in a yield by investing only in securities whose maturity matches the maturity of the fund. They are suitable for investors who have a fixed tenure in mind.

They invest in marketable debt securities like certificates of deposits (CDs), commercial papers (CPs), other money market instruments, corporate bonds, non-convertible debentures (NCDs) of reputed companies, or government securities, maturing in line with the scheme's tenure. Moreover, unlike fixed deposits, they don’t have a guaranteed rate of return.

Since they are close-ended schemes, they are mandatorily listed on stock exchanges. Only units held in dematerialized mode can be traded, so investors seeking liquidity in such schemes need a demat account.

As of February 29, 2024, this fund category has assets under management (AUM) of Rs 18,956 crore, with the oldest being more than 17 years old, according to the Association of Mutual Funds in India (AMFI). SBI Fixed Maturity Plan, DSP FMP, Axis Fixed Term Plan, HDFC FMP, and Kotak FMP are the top-ranked schemes by AUM, respectively.

Source: AMFI website as of February 29, 2024

While you should identify your risk profile and plan your financial goals before investing in Fixed Maturity Plans, here are some situations where they may fit in:

Alternative to Bank Fixed Deposits

As of February 19, 2024, Fixed Maturity Plans (FMPs) offer potentially higher returns (7.5%-9.7%) compared to fixed deposits from large banks (6.5%-7%). While FMPs carry some market-related risk, they provide an opportunity to outpace traditional bank fixed deposits.

Source: Valueresearch, SBI, HDFC Bank, ICICI Bank, BOB websites as of February 19, 2024

Note: While Fixed Maturity Plans are good alternatives to bank fixed deposits, they are not insured like them. Up to Rs. 5 lakh per bank account are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Low Risk Tolerance:

They are relatively low-risk investments compared to equity or even some open-ended debt funds. Conservative investors who prioritise capital preservation and predictable returns may find FMPs attractive.

 Short Term Capital Gains (STCG) TaxLong Term Capital Gains (LTCG) Tax
Before 1st April 2023All gains registered within 24 months from the investments are taxed at your slab rate.All gains registered after 24 months from investments are taxed at a 12.5% tax rate.
On and after 1st April 2023Slab rate.Slab rate

Dividend Taxation

These funds pay out dividends when you invest in their IDCW (Income Distribution Cum Withdrawal) option. Dividends are taxed at your marginal income tax rate, and TDS (Tax Deducted at Source) at 10% applies to dividends received more than Rs 5,000 per AMC per financial year.

Predictable Returns

They provide investors with a relatively predictable return at the time of investment. The fixed maturity structure allows investors to know the expected yield, making it easier to plan for future cash flows or financial goals.

Low Volatility

The closed-ended structure means that the fund is not subject to daily redemptions, reducing the impact of market volatility on the portfolio. Investors can hold their investment until maturity without being affected by market sentiment.

Diversification

Fixed Maturity Plans invest in a diversified portfolio of debt instruments, including government securities, corporate bonds, and money market instruments. Diversification helps spread risk and can contribute to portfolio stability.

Stable Income

They generate income for investors through interest payments on the underlying debt securities. This can be attractive for income-oriented investors looking for a regular and stable income stream.

Interest Rate Risk

Fixed Maturity Plans are sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds tend to fall. Conversely, when rates decline, bond prices may rise. Investors in Fixed Maturity Plans may face capital losses if interest rates move unfavourably.

Market Risk

Fixed Maturity Plans invest in a mix of debt securities, and their performance is influenced by market conditions. Economic factors, credit risk, and overall market volatility can impact the fund's returns.

Credit Risk

Fixed Maturity Plans may invest in bonds with varying credit qualities. A downgrade in the credit rating of the bonds in the portfolio could lead to losses.

Lack of Liquidity

They have a fixed maturity period, and during most of this period, investors cannot redeem their units. While some FMPs may offer limited liquidity options through a stock exchange platform, the liquidity is generally restricted compared to open-ended funds. This lack of liquidity can be a disadvantage for investors who may need to access their funds before maturity.

Fixed Maturity Plans offer Indian investors a low-volatility investment option with the potential for slightly higher returns than traditional bank fixed deposits. They're best suited for those who have a clear investment horizon in mind and are comfortable with some degree of market-linked risk. Fixed Maturity Plans are ideal for those seeking diversification, income generation, and a more predictable return profile than equity-based funds. Before investing, carefully consider your individual risk tolerance and financial needs to ensure they align with your goals.

All about Fixed Maturity Plans – Basics, Taxation & Benefits of Fixed Maturity Plans

What are Fixed Maturity Plans?

Fixed Maturity Plans are close-ended debt mutual fund schemes that eliminate interest rate risk and lock in a yield by investing only in securities whose maturity matches the maturity of the fund. They are suitable for investors who have a fixed tenure in mind.

They invest in marketable debt securities like certificates of deposits (CDs), commercial papers (CPs), other money market instruments, corporate bonds, non-convertible debentures (NCDs) of reputed companies, or government securities, maturing in line with the scheme's tenure. Moreover, unlike fixed deposits, they don’t have a guaranteed rate of return.

Since they are close-ended schemes, they are mandatorily listed on stock exchanges. Only units held in dematerialized mode can be traded, so investors seeking liquidity in such schemes need a demat account.

As of February 29, 2024, this fund category has assets under management (AUM) of Rs 18,956 crore, with the oldest being more than 17 years old, according to the Association of Mutual Funds in India (AMFI). SBI Fixed Maturity Plan, DSP FMP, Axis Fixed Term Plan, HDFC FMP, and Kotak FMP are the top-ranked schemes by AUM, respectively.

Source: AMFI website as of February 29, 2024

Who Should Invest in Fixed Maturity Plans?

While you should identify your risk profile and plan your financial goals before investing in Fixed Maturity Plans, here are some situations where they may fit in:

Alternative to Bank Fixed Deposits

As of February 19, 2024, Fixed Maturity Plans (FMPs) offer potentially higher returns (7.5%-9.7%) compared to fixed deposits from large banks (6.5%-7%). While FMPs carry some market-related risk, they provide an opportunity to outpace traditional bank fixed deposits.

Source: Valueresearch, SBI, HDFC Bank, ICICI Bank, BOB websites as of February 19, 2024

Note: While Fixed Maturity Plans are good alternatives to bank fixed deposits, they are not insured like them. Up to Rs. 5 lakh per bank account are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Low Risk Tolerance:

They are relatively low-risk investments compared to equity or even some open-ended debt funds. Conservative investors who prioritise capital preservation and predictable returns may find FMPs attractive.

Taxation of Fixed Maturity Plans

 Short Term Capital Gains (STCG) TaxLong Term Capital Gains (LTCG) Tax
Before 1st April 2023All gains registered within 24 months from the investments are taxed at your slab rate.All gains registered after 24 months from investments are taxed at a 12.5% tax rate.
On and after 1st April 2023Slab rate.Slab rate

Dividend Taxation

These funds pay out dividends when you invest in their IDCW (Income Distribution Cum Withdrawal) option. Dividends are taxed at your marginal income tax rate, and TDS (Tax Deducted at Source) at 10% applies to dividends received more than Rs 5,000 per AMC per financial year.

Advantages of Fixed Maturity Plans

Predictable Returns

They provide investors with a relatively predictable return at the time of investment. The fixed maturity structure allows investors to know the expected yield, making it easier to plan for future cash flows or financial goals.

Low Volatility

The closed-ended structure means that the fund is not subject to daily redemptions, reducing the impact of market volatility on the portfolio. Investors can hold their investment until maturity without being affected by market sentiment.

Diversification

Fixed Maturity Plans invest in a diversified portfolio of debt instruments, including government securities, corporate bonds, and money market instruments. Diversification helps spread risk and can contribute to portfolio stability.

Stable Income

They generate income for investors through interest payments on the underlying debt securities. This can be attractive for income-oriented investors looking for a regular and stable income stream.

Disadvantages of Fixed Maturity Plans

Interest Rate Risk

Fixed Maturity Plans are sensitive to changes in interest rates. When interest rates rise, the prices of existing bonds tend to fall. Conversely, when rates decline, bond prices may rise. Investors in Fixed Maturity Plans may face capital losses if interest rates move unfavourably.

Market Risk

Fixed Maturity Plans invest in a mix of debt securities, and their performance is influenced by market conditions. Economic factors, credit risk, and overall market volatility can impact the fund's returns.

Credit Risk

Fixed Maturity Plans may invest in bonds with varying credit qualities. A downgrade in the credit rating of the bonds in the portfolio could lead to losses.

Lack of Liquidity

They have a fixed maturity period, and during most of this period, investors cannot redeem their units. While some FMPs may offer limited liquidity options through a stock exchange platform, the liquidity is generally restricted compared to open-ended funds. This lack of liquidity can be a disadvantage for investors who may need to access their funds before maturity.

Conclusion

Fixed Maturity Plans offer Indian investors a low-volatility investment option with the potential for slightly higher returns than traditional bank fixed deposits. They're best suited for those who have a clear investment horizon in mind and are comfortable with some degree of market-linked risk. Fixed Maturity Plans are ideal for those seeking diversification, income generation, and a more predictable return profile than equity-based funds. Before investing, carefully consider your individual risk tolerance and financial needs to ensure they align with your goals.

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They collect funds from investors during the NFO (New Fund Offer) period and invest in a diversified portfolio of fixed-income securities. The plan is closed-ended, and the maturity date is predetermined.
They typically invest in a mix of debt instruments such as corporate bonds, government securities, and money market instruments with a maturity profile matching the tenure of the plan.
They are close-ended, and liquidity is generally not available before the maturity date. Investors can sell units on stock exchanges if there is a secondary market for the specific FMP.
They may not provide regular income in the form of periodic interest payouts. Instead, investors typically receive the accumulated returns at the time of maturity.
None of the funds present in this category have any exit load on them.
As of February 2024, these funds have an expense ratio ranging from (0.04% to 0.29%).
It varies and is predetermined at the time of launch. It can range from a few months to several years, depending on the specific plan.

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Disclaimers: Data can be sourced from Morningstar, Bloomberg, CRISIL, etc. Information gathered and provided herein is believed to be from reliable sources.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Mutual Fund distribution services are offered through Dezerv Distribution Services Private Limited, a wholly owned subsidiary of Dezerv Investments Private Limited (collectively referred to as “Dezerv”) with AMFI Registration No.: ARN- 248439.Read More
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