When it comes to investments, some people choose high-risk, high-return instruments, and there are others who select low-risk, low-return instruments. I belong to the second category here, not because I am okay with low returns but because I am a risk-averse investor. I am sure a lot of you belong to my group as well. Choosing this category leaves us with very few investment options; the most popular of them being fixed deposit (FD) accounts.
Nonetheless, here is a new option—Fixed Maturity Plans (FMPs) that is capable of being the alternative to our regular fixed deposits. Here is all that you need to know about FMPs. After reading the article, you will want to change your bias to FMPs for investment this financial year!
What are FMPs? How do they work?
As the name suggests, fixed maturity plans are closed-end debt funds that come with a fixed maturity period. Unlike open-ended debt funds, FMPs will not be available for continuous subscription. The fund house sets an opening date and a closing date for every New Fund Offer (NFO). After the closing date, you cannot invest in that NFO.
The focus of FMPs is to provide regular returns over the specified period and to protect investors from market fluctuations. Since debt funds with a maturity period beyond three years count for long-term capital gains tax, three-year FMPs have gained popularity lately.
Where do FMPs invest?
Usually, FMPs invest in debt instruments, such as commercial papers, certificates of deposits, money-market instruments, corporate bonds, and bank fixed deposits. The fund manager chooses investment instruments such that they have a similar maturity period. Therefore, investors will have an idea on the rate of returns of their plan.
What benefits can you expect?
- Security: Debt instruments include a low-risk of capital loss in comparison with equity instruments.
- No Interest Volatility: The securities are held in the portfolio from the time of investment until maturity. Therefore, interest rate volatility is not a concern.
- Tax Benefits: The post-taxation returns of FMPs are much better than that of FDs, liquid debt funds, and ultra-short-term debt funds. Since FMPs provide indexation benefits, it lowers capital gains and tax liability.
- Low Expenses: Since your investments stay with one instrument for the entire period, the cost involved in buying and selling instruments is nullified, resulting in lower expense ratio.
How are FDs and FMPs Similar or Different?
They are similar because both the instruments require you to stay invested over a specified period and allow you to choose the maturity period based on your convenience.
From the returns perspective, they are on the opposite ends. Unlike the FD certificate that specifies the guaranteed return amount, FMPs provide only indicative returns. That means the actual returns may be higher or lower than the indicative returns specified during the launch.
You may have to pay DDT on the dividend and capital gains tax on growth option with FMPs. Also, the instrument may not give you a perfect liquidity option, as in the case of FDs.
Reading about FMPs made me step up my investment preferences and choose them as my next investment option for this financial year. Once you have set up your emergency funds with instruments that can be liquidated at any time, you can take your next step towards investment with FMPs. What do you think?
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