Fixed Maturity Plans: Features & Limitations

Fixed Maturity Plans: Features & Limitations

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Fixed maturity schemes provide investors returns that are fairly predictable, low on risk and also tax efficient. Read on to learn more about these investment instruments.

Looking for an investment avenue that provides steady returns for a fixed period of time with minimum market risk? Consider fixed maturity schemes! They are close-ended debt funds that come with pre-defined lock-in tenure. In other words, they cannot be redeemed (fully or partially) before completion of maturity, which can range from anything between 30 days to five years. The portfolio typically comprises investments in diverse debt instruments such as bonds and government securities. Here’s all that you should know about this investment tool.

Main Features:

  • Closed-ended Funds:

This class of mutual funds can be bought only for a few days during the launch of a New Fund Offer (NFO). After the closing date, the offer to invest terminates. Units held in Demat mode have an exit option via the stock exchange, but the liquidity is pretty low as they are thinly traded securities.

  • Fixed Tenure Period:

Since investors have a fairly good idea on how much return the scheme is likely to generate at the NFO stage, they can choose a plan that fits their investment horizon and monetary requirements.

  • Investment Strategy:

The corpus is invested in money market instruments, Commercial Papers (CP), Certificate of Deposits (CD), Corporate Bonds, Government Securities, Treasury Bills, Bank Fixed Deposits and Convertible Debentures (NCDs), etc.  The investment is made in reputable and highly credit rated niche companies, hence the possibility of default is practically nil.

  • No Interest Rate Risk:

Fixed maturity schemes have the least exposure to interest rate risk. Being close-ended instruments without the option of early redemption the securities are held by the fund till the maturity date. As a result, they yield adequate returns for tenure.

  • Lower Expense Ratio:

Given that the investment comes with a pre-fixed maturity period, it helps save cost in terms of buying and selling of securities. This low expense ratio benefit is ultimately transferred to the investors.

  • Offers Tax Efficiency:

The plans offer efficiency in taxation. If the tenure is longer than a year, investors can enjoy long term capital gains, including indexation benefits against inflation.

Some Limitations:

  • Low Liquidity: 

Fixed maturity schemes have low levels of liquidity. Redemption of open-ended debt funds can be made any time after the exit load period without paying the penalty. Also, premature withdrawals are allowed in fixed deposits. Fixed maturity investments, in contrast, cannot be cashedprior to maturity.

  • Locked-In Rates: 

While locked-in rates slash the risk when interest rates are on the decline, they prevent the investor from capitalising on price appreciation and enjoying higher returns when the market rates soar.

  • Returns Not Guaranteed: 

Returns from fixed maturity tools are market-linked and hence not assured or guaranteed. Though exposure to default is slight, the odds of the company issuing the debt being unable to repay the principal amount cannot be ruled out.

Bottom Line:

All in all,Fixed Maturity Plans (FMPs) are great investment options that yield superior returns with no volatility or interest rate risk. Not to mention these can prove to be tax-efficient for long term investors. Having said that, it’s essential to factor in the limitations and consult a financial advisor to ensure this class of close-ended debt funds is suitable for your investment needs.

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