All About FMps

Understanding Fixed Maturity Plans (FMPs)

(1) What are Fixed Maturity plans?
(2) FMPs do not guarantee returns but their returns are fairly predictable
(3) What are FMP maturity periods?
(4) Can I withdraw before maturity?
(5) What to look out for?
(6) What to look out for?
(7)Risk Factors
(1) What are Fixed Maturity plans?A Fixed Maturity Plan (FMP) is a fixed income scheme and generally is 100% equity free. FMPs have a fixed life and a definite maturity date i.e. they are closed ended schemes and hence the name Fixed Maturity. Post the maturity date the fund ceases to exist and your investment along with the appreciation is automatically returned back to you.

(2) FMPs do not guarantee returns but their returns are fairly predictableThough Fixed Maturity plans do not guarantee returns they are relatively more predictable in their returns. Here’s how.As investments generally do not flow in or out during the tenure of the scheme it allows the Fund manager of the FMP to lock into a pre-decided fixed instrument (could be debentures, Commercial Paper, Certificate of Deposit, Gilts i.e. securities issued by the Government of India.) and hold on to it till the expiry of the instrument. Quite naturally the maturity profile of this fixed income instrument would be similar to the maturity profile of the scheme thus lending FMPs their relative predictability. Thus unlike an open ended fixed income fund, the fund manager here generally does not trade.

(3) What are FMP maturity periods?FMPs come in various maturities. Typical maturity periods are 90 day, 180 days, yearly (though the maturity tends to be slightly more than a year to avail of double indexation benefits), 3 years etc. A 90 day FMP simply means a FMP with a maturity of 90 days.

(4) Can I withdraw before maturity?FMPs that have a maturity of more than 90 days, have to provide investors specific exit dates where investors can withdraw. But this comes at a price. These exit dates are pre-decided and known beforehand.You can withdraw only after paying an exit load i.e. a penalty for early withdrawal as the fund manager may have to break the scheme’s investment in an otherwise locked-in instrument thus entailing transaction costs and in an extreme scenario even a decline in returns of the portfolio as new instruments may or may not yield the earlier yields.

(5) What to look out for?Though FMPs have a definite maturity, the credit quality of the portfolio is crucial. Credit quality simply means if the issuer of the fixed instrument that the fund manager chooses to invest in is reputable or not. AAA is the rating that is issued to a reputed borrower. Logically a better quality portfolio should yield you less than a portfolio which compromises on portfolio for returns.

(6) FMPs are less taxingDividends declared in FMPs are completely tax-free in your hands though the fund deducts a Dividend distribution tax of 14.1625% at source.