What is an FMP(Fixed Maturity Plan)?

Mutual
Two

funds

features

make

offer
them

Fixed
distinct

Maturity
from

other

Plans.
fund

schemes:

1. Tenure
FMPs have a fixed maturity date. It could be 15 days, 30, 90, 141, 180 or even 365
days.
even

Some
have

two,

three

or

five-year

time

frame.

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.

What is the tax impact?

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. If you Opt for Dividend Payout than DDT(Dividend distribution
tax ) is 14.1625% for Individual & 22.66% for Corporates

What sets them apart?

FMPs are mutual fund schemes that last only for a fixed period of time. It could be
as little as 15 days or as long as five years. They invest primarily in fixed return
investments like government bonds and money market instruments (very shortterm fixed return investments).

Why they make a good investment ?

FMPs are great investment option when there is a lot of interest rate volatility.
FMPs invest in instruments that mature at the same time their schemes come to
an end. So a 90day FMP will invest in instruments that mature within this period.
This insulates such schemes from volatility in the interest rates.
When interest rates in the market rise, the price of existing bonds (the selling
price) falls. Because nobody wants to buy a bond that offers a lower interest rate.
These schemes manage to mitigate the interest rate risk because the fund
manager does not have to keep buying and selling bonds (and such fixed return
investments) to make a profit. He can just buy them and hold onto maturity.

Are FMP returns assured?

FMPs produce predictable returns over the desired timeframe since the maturity of
the portfolio matches the tenure of fund schemes. Unlike other schemes that
suffer from volatility and, hence, risk of erosion in asset value, an FMP -structured as closed-end funds -- carries no interest rate risk. Whether yields rise
or fall, the asset value of these schemes is protected as deposits / bonds are held
to maturity.

Do NAVs move sharply?

No. This is a debt product. Debt product NAVs move up / down as per the
movement of interest rates and changes in credit ratings of the underlying
securities, and it also might go up if it's favourable during the term of the
scheme. And if you stay till maturity of 90 days / 366 days / 24 months etc as per
the scheme term, you need not even look at its everyday NAV. Just treat it like a
fixed deposit.

Do some FMPs have equity component?

It will be mentioned clearly if they are going to invest some part in equity.
Normally, short duration FMPs don't invest in equities at all. When the term is 3-5
years, some FMPs may have exposure to equity, which will be clearly mentioned.
How to select between Bank Fixed deposits & FMPs?
Calculate Post-Tax Returns -- That's where you win or lose.
FMP v/s FD?
FIXED MATURITY PLANS
(FMP)
Interest

FIXED DEPOSITS, PUBLIC

DEPOSITS

RateActual return is almost asInterest rate changes affect

Risk
Market Risk

andsame as indicated at timethe actual returns earned

of investment as
returns
are

at end of term
insulated

against interest
rate changes.
Penalty on pre- A

nominal

exit

load

isPenalty is charged on the

maturity

deducted on
withdrawing

Tax Burden

maturity
Investor can enjoy DoubleFDs and PDs are subject to
Indexation
reduce

their

funds

basis of
beforetime left to maturity.

Benefit
tax

toTDS at rate depending on

burdeninvestors.

substantially.

Thus,

effective

returns turns out to be very

low because of TDS.

FMPs, with tax-adjusted returns, score higher both in case of Short term
and Long term investments.
In short term the dividend earned in the dividend option of FMPs are more tax
efficient than the Growth option as the Dividend distribution Tax (DDT) is
relatively lower than the highest tax slabs.
The attraction increases when the term selected by you is over 365 days. Let's
consider a bank FD offering 8.00% and an FMP offering 8.00%. In a bank FD you
have to pay 30% tax (if you are in the highest tax bracket). So your post tax
return is 8.00% minus 30% tax on it, which leaves you with a paltry 5.60% post

tax returns.
Whereas, in FMPs you need to pay just 10% concessional Long Term Capital Gain
Tax without indexation or 20% with indexation for investments of over a year. So
your post tax return is 8.00% minus 10% tax on it, which leaves you with a smart
7.20% post tax returns. (Add 2% education cess & 10% surcharge if applicable on
tax paid in both cases).
Fixed Income instruments seem to be stealing the show these days.