Fixed Maturity Plan
   
       
What is an FMP?  

Mutual funds offer Fixed Maturity Plans.

Two features make them distinct from other fund schemes:
 
     
1. Tenure  
FMPs have a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365 days. Some even have a three or five-year time frame. Recently, Birla launched such a plan for 18 months and 36 months.

At the end of this period, the scheme matures, just a like a fixed deposit.
 
2. Investments
FMPs invest in fixed income instruments, like bonds, government securities, money market instruments (very short-term fixed return investments), to name a few.
 
How long is the money blocked?
Before the scheme opens, the tenure is made known. You must pick a tenure most suited for you.

Note: FMPs are either open ended (more the exception) or close ended (more the norm). Open ended funds allow you to enter (buy units) and exit (sell units) any time you want.

Close ended means they remain open for subscription only for a short period of time. They then close and do not accept any fresh deposits. They also do not allow current investors to withdraw. So your money is locked in during that time frame. If you need the money urgently, you can sell your units. But you will have to pay an exit load (the fee when you sell the units of a fund).

Close ended schemes charge a load between 1% and 2% of the Net Asset Value (price of a unit of a fund) at the time of withdrawal. This is referred to as an exit load and is levied when an investor wants to sell his/her units.The reason for this steep load is to dissuade investors from exiting before the fund matures.

Of course, if you hold on till maturity, you will not have to pay an exit load. Generally, there are no entry loads for such schemes. This is a fee charged when investors buy the units of a fund.
 
How do they differ from income funds?
An income fund will invest in the same instruments like an FMP. But an open ended income fund will not have a fixed tenure. Because the tenure of the scheme is fixed, it makes investing easier for the fund manager. He can invest in instruments that will mature around the same time the scheme matures, in one go.

So a fund manager with an FMP of a five-year maturity, for instance, will invest only in instruments that have a five-year maturity. Similarly, a one-year FMP will invest in one-year maturity investments.Because of this, he can even give an indicative return (though he cannot assure one) unlike an income fund.
 
How do they differ from fixed deposits?
The similarity first: both have fixed tenures. The difference: a fixed deposit gives assured returns. You know what you are getting and when.

An FMP will give an indicative, but not assured, return. You will be expected to invest a minimum of Rs 5,000 in an FMP. Not so in the case of a bank deposit, which can be less.
 
What is the tax impact?
If you invest in an FMP, the dividend is tax-free in the hands of the individual investor. If you invest in the growth option of the FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate.

If you invest in the growth option of the FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation. Indexation is the process by which the inflation is taken into account when computing the tax liability. To understand indexation, read All about capital gain.
 
What are the returns you can expect?
The mutual fund will have to pay a dividend declaration tax of 14.5%. After deducting that, returns in the hands of the investor can be higher than a bank deposit.

Let's assume an FMP gives a return of 5.50% for a one-year plan. Against that compare a one-year bank fixed deposit.

 

FMP dividend option

Bank deposit

Amount invested (Rs)

100

100

Return (%)

5.5

5.75

Less: Dividend declaration tax

borne by the mutual fund

14.5%

-

Personal income tax rate

-

30%

Post-tax return

4.70%

4.02%

 
 
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