A detailed guide on Fixed Maturity Plans
Not everybody who invests in the market does so with the aim of chasing high returns. Thus, there are many investors who seek relative stability of principal and consistency of income from their investments. Fixed Maturity Plans (FMPs) are a category of mutual funds designed with such investors in mind.
Let’s discuss Fixed Maturity Plans and explore their features, potential benefits, and other considerations for investors.
- Table of contents
- What are fixed maturity plans?
- Portfolio construction
- Return potential
- Features of Fixed Maturity Plans
- Potential benefits of investing in Fixed Maturity Plans
- Things to know before investing
- FAQs
What are fixed maturity plans?
Investors who are considering an FMP MF must invest a lumpsum amount in the chosen scheme for a predetermined period. Thus, FMPs are essentially close-ended debt schemes that can be invested in only during the New Fund Offer (NFO) period – i.e., before the NFO closes.
Portfolio construction
FMP portfolios primarily comprise debt instruments such as government securities, corporate bonds, and money market instruments. The maturities of the underlying securities align with the tenure of the scheme. For example, you can opt for FMPs with maturities ranging from 1 month up to 5 years. Thus, all investors can choose a fixed maturity plan that aligns with their objectives and investment horizon.
Return potential
Additionally, Fixed Maturity Plans offer a modest return potential along with relative stability of the principal compared to equity-oriented fund investments. Thus, FMPs can be considered as a reasonable alternative to bank Fixed Deposits for investors seeking a relatively higher return potential with only slightly higher associated risk. However, the FMP return potential is closely linked to the prevailing interest rates and the quality of the underlying securities. It must be noted that FMPs do not guarantee fixed returns.
Features of Fixed Maturity Plans
- Fixed tenure: FMPs have a fixed maturity period ranging from a few months to a few years.
- Relatively low volatility: Due to their focus on debt instruments with fixed maturities, FMPs tend to have relatively lower volatility compared to equity-oriented mutual funds.
- Low liquidity: Since FMPs have a fixed maturity period and usually do not allow premature withdrawals, they are relatively less liquid compared to other fixed maturity options like Fixed Deposits, which may offer ease of premature redemption.
Potential benefits of investing in Fixed Maturity Plans
- Relative Stability: FMPs offer investors the opportunity to earn potentially stable returns over a fixed tenure, making them suitable for goal-based investments.
- Diversification: FMPs invest in a diversified portfolio of debt instruments, reducing the concentration risk associated with investing in individual securities.
- Alternative to FDs: Investors seeking a slightly higher return potential compared to bank FDs with only slightly higher associated risk may find FMPs suitable. However, returns from FMPs are linked to market, and hence, not guaranteed.
Things to know before investing
- Interest rate risk: FMP returns are sensitive to changes in interest rates. A rise in interest rates can affect the return potential.
- Credit risk: Always assess the credit quality of the portfolio holdings before investing.
- Liquidity constraints: Unlike some other mutual fund schemes, FMPs have limited liquidity options. Investors should carefully consider their liquidity needs before investing in FMPs.
- Market outlook: Assess interest rate movements, inflation, and overall economic landscape before investing in FMPs.
Conclusion
Fixed Maturity Plans offer investors a relatively stable return potential and relatively lower risk compared to equity-oriented mutual funds. However, investing in these funds means that investors must stay committed throughout the tenure of the scheme. FMPs can be considered by individuals who seek less impact of market volatility and income generation potential beyond bank Fixed Deposits, although with slightly higher associated risk. However, it's essential for investors to consult a financial advisor for tailored investment advice suited to their unique situation.
FAQs:
What are fixed maturity plans (FMPs)?
Fixed Maturity Plans (FMPs) are mutual fund schemes that invest in debt instruments with a fixed maturity period ranging from a month to a few years. Investments in these schemes can be made only during the NFO period.
What kind of investors should consider investing in fixed maturity plans?
Investors seeking relative stability of capital and a modest return potential with relatively lower risk can consider FMPs. However, it is essential to evaluate one’s liquidity requirements before investing as these plans are usually close-ended and do not allow premature redemptions.
What is the tenure of fixed maturity plans?
The tenure of FMPs can vary from 1 month up to 5 years. Investors can choose a suitable scheme with a maturity that aligns with their investment horizon.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.