Understanding the benefits of investing in fixed maturity plans

Fixed Maturity Plans or FMPs are close-ended debt mutual fund schemes that have a fixed maturity period ranging from one month to five years. Such a scheme may suit investors who want a low-to-moderate risk investment avenue with stable return potential and can lock-in their capital.

Units can only be purchased during the New Fund Offer (NFO) at the scheme’s launch and can only be redeemed at maturity. However, FMPs are listed on stock exchanges and investors can buy or sell units on the secondary market, albeit with some liquidity challenges.

• Table of contents

1. Features of fixed maturity plans
2. Risk associated with fixed maturity plans
3. How to select the right fixed maturity plans?
4. What are the benefits of investing in fixed-maturity plans?
5. Who should Invest in fixed maturity plans (FMP)
6. What are the limitations of investing in fixed maturity plans?

Features of fixed maturity plans

Here are the key features of FMPs:

• Fixed maturity period: Fixed Maturity Plans come with a fixed maturity period that may range from one month to five years or more. The fund manager constructs the portfolio in such a way that the maturity of the underlying securities aligns with the maturity date of the fund.
• Close-ended structure: Once the NFO period for a Fixed Maturity Plan closes new investors cannot enter the scheme, and existing investors cannot exit until the maturity date. However, buying and selling units is allowed in the secondary market.
• Stable return potential: FMPs have a relatively stable return potential. The fund manager tries to generate potentially returns by investing in fixed-income securities with interest rates applicable at the time of investment and maturity dates that align with the scheme’s maturity. This is one of the key benefits of Fixed Maturity Plans.
• Investment portfolio: Fixed Maturity Plans primarily invest in debt instruments such as government securities, corporate bonds, money market instruments, and other fixed-income securities with varying maturities.

Risk associated with fixed maturity plans

FMPs are generally considered to hold low-to-moderate risk. However, they are not entirely risk-free. Here are the risks associated with them:

• Credit risk, which is the default risk associated with underlying securities.
• Interest rate risk, which is associated with how changes in interest rates affect the underlying bond prices.
• Liquidity risk, which depends on the availability of buyers/sellers in the secondary market.

How to select the right fixed maturity plans?

Here's a step-by-step guide to help you choose a Fixed Maturity Plan:

• Define your investment goals: Start by defining your investment goals and objectives. Determine the purpose of investing in a Fixed Maturity Plan, whether it's mitigated impact on capital invested, income generation, or achieving specific financial milestones.
• Assess your risk tolerance: Fixed Maturity Plans entail low-to-moderate risk.
• Understand the investment strategy: Look at the types of debt securities and fixed-income instruments that the Fixed Maturity Plan invests in as well as the average maturity and credit quality of the portfolio. These factors can influence the risks associated with the scheme. Look at all the scheme-related documents for details.
• Consider the maturity period: Determine the desired maturity period for your investment and choose an FMP with a maturity period that aligns with your goals and horizon. Longer maturity periods may offer a relatively higher return potential but may also carry higher interest rate risk. Moreover, you cannot redeem the units until the scheme’s maturity, so if your investment horizon is shorter than the fund’s duration, you will need to sell units in the secondary market, which entails liquidity and price risk.
• Review expenses and fees: Fixed Maturity Plans have relatively lower expense ratios compared to equity funds. They may still levy management fees, administrative expenses, and other charges. Review their expense structure and consider the impact on your overall returns.

What are the benefits of investing in fixed maturity plans?

Some of the important benefits of fixed maturity plans are mentioned below:

Relative stability: Fixed Maturity Plans provide a chance to earn potentially stable returns over a set period, making them good for planned investments.

Diversification: Fixed Maturity Plans invest in various debt instruments, lessening the risk of focusing on single investments.

Alternative to FDs: Investors looking for relatively better returns than bank FDs, with slightly more risk, might consider FMPs. However, these returns are linked to the market and not assured.

Who should Invest in fixed maturity plans (FMP)

Fixed maturity plans (FMPs) are suitable for investors who are looking for:

Relatively stable returns: FMPs offer the potential for relatively stable returns over a fixed period, making them suitable for those who prefer predictability.

Goal-based investments: They can be suitable for investors with specific financial goals, as they provide a fixed tenure for investment.

Risk management: Investors interested in managing risk through diversified investments in debt instruments may find FMPs suitable.

Alternative to Fixed Deposits: Individuals seeking slightly higher returns than traditional bank fixed deposits (FDs), with a comparable level of risk, may consider FMPs as an alternative.

Market-linked returns: Those comfortable with returns linked to market conditions, rather than guaranteed returns, can also consider FMPs.

What are the limitations of investing in fixed maturity plans?

Some of the major limitations of FMPs are as follows:

Lower potential returns:

Fixed maturity plans typically offer lower yields compared to equity funds because returns are fixed throughout the investment period. This means investors miss out on potential gains from market upswings since interest incomes remain constant.

Lock-in period:

Investing in a fixed maturity plan requires locking in the principal amount for a specified duration without the option for partial withdrawals. This restriction can strain investors' liquidity needs.

Conclusion

Investing in Fixed Maturity Plans offers a reasonable return potential at low-to-moderate risk along with the benefits of mitigated impact on capital invested and portfolio diversification. These schemes can be suitable for investors with clear short to medium-term goals. However, you must conduct thorough research to select the right FMP that aligns with your financial goals, risk tolerance, and investment preferences.

FAQs:

What are the benefits of investing in fixed maturity plans?

Here are the 3 main benefits of fixed maturity plans:

• Stable return potential: Since FMPs invest in fixed-income securities with reasonable return potential and maturity dates.
• Lower risk: FMP investments come with a low-to-moderate risk since they primarily invest in debt instruments.
• Relative stability of capital: Your principal amount is not exposed to high risk since FMPs generally invest in high-quality debt securities.

Who should invest in fixed maturity plans?

You can consider investing in FMPs if you have a low-to-moderate risk appetite, seek portfolio stability via debt funds with a fixed maturity period, and prioritize stable return potential over high growth.

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.