What are Fixed Maturity Plans (FMP)

Most of us like investments which offers assured returns and have an exact date of maturity. Hence Fixed Deposits are very popular. But disadvantage of Fixed Deposits is that interest earned is taxable as per your income slab.We wish for having an investment option which has a maturity date, is tax efficient and returns are comparable to that of Fixed Deposits. Well Fixed Maturity Plans or FMPs from Mutual Funds Houses are just that. Fixed maturity plans (FMPs) are an alternative to bank and company fixed deposits (FDs) and open ended debt funds.

What are Fixed Maturity Plan?

Fixed maturity plans are closed-ended income schemes by Mutual Fund houses that invest in fixed income instruments or debt securities with maturity coinciding with the maturity of the scheme.

  • The FMP invests in debt instruments such as treasury bills (T-bills) commercial papers (CPs), certificates of deposit (CDs), and government and corporate bonds with maturity coinciding with the maturity of the scheme.
  • Close ended funds are open for subscription for a limited and you can only invest in them during that period, called as the New Fund Offer (NFO). It also means that you redeem(sell the units to the fund house) them only on maturity.  These are listed on stock exchange and you can sell to others on exchanges.
  • The minimum investment required under fixed maturity plans is typically Rs. 5,000.

For example, if a fund launches an FMP for 367 days between Nov 14- Nov 17, so if an investor can invest in this fund between Nov 14  - Nov 17. He will get his money back after 367 days. The Fund Manager of FMP will buy certificates of deposit (CDs) and commercial papers (CPs) that will mature after 367 days. Information about FMPs that are open are available in Scheme Offer or Information Document. To read a sample SID Of Reliance FMP click RelianceFixedHorizonFundXXVSeries1 (pdf format).

What is the time period or Tenure of  FMP?

Fixed maturity plans come with different maturities: 1 month, 3 months, 6 months, 13 months , 3 years, 5 years. So you should choose one that matches your investment duration.

What are Dividend and Growth Option of FMP

  • Growth : Under growth option, you will not receive any returns in the intermediate. You will return the lump sump on maturity. Returns earned are treated as capital gains (short-term or long-term depending on tenure of investment).
  • Dividend option: It is a dividend Payout option. Under this the profits of mutual funds are distributed amongst the investors at various intervals . If you opt for the dividend scheme, remember that practically the entire return on investment is by way of dividends. In such a case, the Mutual Fund would pay Dividend Distribution Tax (DDT) at 28.325% of the dividend declared and the dividend received by you would be tax-exempt.  At the time of redemption, if the amount realized is higher than the cost, the same would be liable to tax as long-term or short-term capital gains as in growth option.

Taxation of Fixed Maturity Plan

Fixed Maturity Plans are treated like Debt Mutual Funds, tax implication depends on the investment option (dividend or growth) and holding period of FMP.

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