Fixed Maturity Plans (FMP) in Mutual Funds

What is a Fixed Maturity Plan (FMP)?

Fixed maturity plans are closed-ended Debt Mutual Fund schemes that invest in a variety of debt instruments such as commercial papers, certificates of deposit, non-convertible debentures, G-Secs, and SDLs (State Development Loans). FMPs are closed-ended schemes, so they can only be purchased from the Asset Management Company (AMC) during the New Funds Offer (NFO) period only. Once an FMP's subscription period has ended, you may be able to buy it on the stock exchanges using your Demat and Trading account if the AMC lists the Scheme on Exchange there you may find a seller.

As the name implies, these schemes have a defined maturity; the maturity of the scheme is specified in the Scheme Information Document. You should read the scheme information document carefully. You cannot redeem FMP units before they mature. You have the option of selling your FMP from your Demat account on the stock exchange before maturity, but the liquidity of these instruments on the exchange is quite low, so you may be unable to find a buyer. As a result, it may be suggested that you should only invest in FMPs if you are willing to commit to the program until it matures. When the FMP matures, the investment proceeds calculated using the maturity Net Asset Value (NAV) will be credited to your bank account.

How do FMPs work?

• FMPs invest in debt securities having maturities that correspond to the scheme's maturity date. These securities are held to maturity, thus there is no interest rate risk. Interest rate risk refers to variations in a scheme's NAV as a result of interest rate changes. Interest rate risk has no impact on FMP returns because the securities are held until maturity. When the bonds mature, you may receive both the accrued interest and as well as the principal amount invested.
• Interest rate risk in FMPs is potentially lower in falling interest rate scenario compared to open-ended debt schemes since the fund manager holds the securities till maturity. As redemptions before the maturity is not allowed in FMP there is no pressure on the fund manager to sell debt securities in the FMP portfolio before they mature.
• FMPs usually have much lower expense ratios compared to open ended debt mutual fund schemes. Once an FMP fund manager deploys the investments of the subscribers immediately after NFO closes, the fund manager simply must wait till maturity – accrual strategy. Not much fund management is required apart from monitoring scheme performance because there is no redemption or purchase till maturity unlike open ended schemes. Lower expenses result in superior returns.
• FMPs may be exposed to credit risk. Typically, the scheme information document or offer document contains information regarding the projected credit quality of FMP securities. You should review the scheme information paper and make informed investment decisions. You should avoid investing in schemes if you are unsure about the credit quality.

Why invest in FMPs?

• Low-interest rate risk since securities may be kept until maturity, as previously mentioned.
• Higher certainty of returns because securities may be held until maturity and no redemptions are permitted. If a scheme keeps securities to maturity, its return might be close to the yield to maturity of the scheme portfolio adjusted for scheme costs (TER).

Conclusion

Fixed maturity plans are potentially a good investment option for locking in current yields for long periods of time (3 - 5 years or more). They aim for stable returns and potentially a good level of return visibility.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.