Fixed Maturity Plans
Whenever, we think of fixed returns, the first investment avenue that comes to our mind is bank fixed deposit
(FD). We often tend to follow the traditional investment avenues as these are considered safe and tend to
provide fixed returns. But Fixed Maturity Plans (FMPs) is another alternate investment avenue which should be
considered before making an investment decision towards your debt portfolio.
What are Fixed Maturity Plans?
Fixed maturity plans are type of debt fund where the investment portfolio is closely aligned to the maturity of
the scheme. AMCs tend to structure the scheme around pre-identified investments. Further, like close-ended
schemes, they do not accept money postNFO (New Fund Offer). The characteristic of FMP is such that they are
passively managed by the fund manager.
FMPs are somewhat different than a fixed deposit in a bank. FMPs are debt schemes, where the corpus is
invested in fixed-income securities. Even though, FMPs may have an exposure to high quality debt securities,
FMP’s returns are not ‘guaranteed’. Predominantly, because the fund house knows only the interest rate of the
securities that the FMP will earn on its investments.
How do they work?
The basic objective of FMPs is to generate steady returns over a fixed tenure, thus shielding investors from
interest rate fluctuations. FMPs achieve this by investing in a portfolio of debt securities [predominantly
certificate of deposits (CDs) and commercial papers (CPs)] whose maturity or tenure matches with that of the
scheme. These securities mature on orbefore the end of the FMP term.
For example, if the FMP is for 12 months, the fund manager will invest in instruments with a maturity of 12
months or less. Since FMPs are closed ended and investors cannot redeem units with the mutual fund during
the FMP tenure, the fund manager need not sell any part of the portfolio (to provide for redemption) during
this tenure thus locking the yield of the portfolio. This also mitigates the risk of loss on premature sale of
securities and lowers the interest rate risk. However, the investors have the option to redeem the units of
FMPs on the stock exchanges, where the FMPs are listed, and hence may impact the portfolio’s return to the
extent of redemptions received. Also, the fund manager at his discretion may churn the portfolio of the FMP
in order to get a better yield.
FMPs, however, are not allowed to provide 'indicative yields' to investors like in the case of FDs, where interest
rates are pre-defined. However, in a rising interest rate environment (as is currently prevailing), FMPs will
inherently capture this trend.
Where do they invest?
FMPs have exposure to high quality bonds (generally AAA/AA rated). As FMP being a debt fund, the portfolio is
more tilted towards fixed income securities like certificate of deposits (CDs), commercial papers (CPs),
Corporate Debt, floating rate instruments, pass through certificates (PTC), money market securities,
government securities etc. The exposure across different debt instruments makes it more attractive and
reduces the portfolio risk.
The FMP comes with different maturities like 1 month, 3 months, 6 months, 1 year, 3 years or even more. The
different maturities provide an option to investors to choose an FMP as per their investment horizon.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.