Fixed Maturity Plan (FMP): Easy Ways To Understand It

Are you looking for an investment option that is secure, like a fixed deposit but gives better returns? Then mutual funds with a fixed maturity plan are something you should consider. They are a type of debt investment that comes with a lock-in period. 

Thus, once you’ve invested, your funds are secure for the decided period. This works in your favour to earn lucrative capital gains. Read on to understand whether this option aligns with your goals.

What is a Fixed Maturity Plan?

There are two types of debt funds: open-ended debt funds and close-ended debt funds. A fixed maturity plan or FMP is a close-ended debt fund with a fixed maturity period. This means that, unlike other debt funds, it follows a strict buy-and-hold strategy.

Thus, you cannot buy or redeem these funds any time you want. There’s a specific subscription period with a lock-in period. This includes commercial papers, certificates of deposit, bonds, treasury bills and other debt instruments. 

Fixed Maturity Plan Features 

While investing in an FMP plan, pay attention to these features for a higher payout:

Portfolio: Investing in FMP allows you to buy debt-oriented assets. This includes treasury bills, government and corporate bonds, commercial papers, certificates of deposit and more. These types of investments help you mitigate the risk of market fluctuations to create a balanced portfolio. 

Lock-in Period: Every FMP has a fixed lock-in period. This ensures that you cannot withdraw the amount before maturity to redeem the maximum returns for your investment. This also prevents you from taking impulsive exits. 

Close-end Scheme: FMPs are close-end schemes where you cannot withdraw the fund before the maturity period. Similarly, you cannot invest in the funds whenever you prefer, as there are limited units for sale.

Quality Assets: The portfolio managers of an FMP firm will choose debt instruments of renowned companies. This helps reduce the risk and aids in building a corpus that generates handsome returns.

Also Read : What is Fixed Deposit?

Taxes on Fixed Maturity Plan

If the FMP units are sold in less than 36 months, your returns are considered a short-term capital gain if this happens before July 23, 2024. If you sell them on or after July 23, 2024, your returns are considered a short-term capital gain. In this case, you pay taxes as per your income tax slab. 

In terms of long-term capital gains, you will pay a flat 20% tax after considering indexation if you transact before July 23, 2024. If it is post that, you will pay 12.5% taxes without indexation. 

Benefits and Restrictions of Fixed Maturity Plans

If you are trying to decide if this is the right investment for you, consider the pros and cons.

Fixed Maturity Plan Benefits

• It caters to a low risk appetite
• It offers stability 

Fixed Maturity Plan Restrictions 

• It offers comparatively lower returns equity investment 
• It may be less liquid than other investments 

Things to Consider Before Investing in a Fixed Maturity Plan

Here are some factors you must consider before investing:

• The probable return of the FMP scheme
• The tax implication based on the scheme’s lock-in period
• The investment objective and how you can achieve it with FMPs
• The expense ratio

Now that you know the meaning of a fixed maturity plan, you can go for it if you have a lower risk appetite, as it can help build your wealth over time. However, since withdrawing your FMP units before time is not possible, you can apply for a Loan Against Mutual Funds from Fibe. This is a great way to have access to cash without compromising your investment. Download the Fibe App and get a loan of up to ₹10 lakhs by pledging your mutual fund as collateral. 

FAQs on Fixed Maturity Plan

What is the lock-in period for a Fixed Maturity Plan?

You can get a lock-in period for a few months to a few years with FMPs. 

Can I withdraw my investment from an FMP before maturity?

Some FMPs are listed on the stock market, which means that you can trade them; however, in general, you can only withdraw after maturity. 

How are Fixed Maturity Plans different from regular mutual funds?

FMPs are debt mutual funds which focus on highly stable securities that offer fixed income. Since the expected returns are shared by the fund house, you can plan your investment in a more informed manner as compared to equity funds, which may be highly volatile. 

Are Fixed Maturity Plans safe investments?

These plans have low exposure to risk as they invest in debt securities. Secondly, the securities are of established listed companies, which are more stable in nature.