How to invest in fixed maturity plans in India
What's the story
Fixed maturity plans (FMPs) are a popular investment option in India, providing a predictable return over a fixed period. They are debt funds with a defined maturity date, which aligns with the tenure of the underlying securities. Unlike other mutual funds, FMPs invest in fixed-income securities and hold them until maturity, which minimizes interest rate risk and gives investors certainty of returns.
#1
Understanding Fixed Maturity Plans
FMPs are closed-ended debt funds that invest in fixed-income instruments, such as government bonds, corporate bonds, and so on.
They have a fixed tenure, usually ranging from one month to five years.
Since they are held until maturity, the returns of an FMP are predictable and not impacted by market fluctuations.
This makes them an attractive option for conservative investors looking for stable returns.
#2
Tax benefits of FMPs
One of the major attractions of FMPs is their tax efficiency.
If held for more than three years, they qualify as long-term capital gains investments.
This means investors pay a lower tax rate of 20% (after indexation) on the gains, instead of the higher slab rates applicable to short-term investments.
This feature can lead to significant tax savings for those in higher income brackets.
#3
Risk factors associated with FMPS
While FMPs are generally considered safer than equity investments, they are not risk-free.
The major risks include credit risk, the possibility of default by issuers of bonds, and liquidity risk, difficulty in selling before maturity.
Investors should carefully check the credit ratings of underlying securities and choose FMPs that match their risk appetite.
Tip 1
Choosing the right FMP
When selecting an FMP, consider factors such as tenure, credit quality of underlying assets, and expense ratios.
Longer tenures may offer higher returns but also expose you to more interest rate risk over time.
Opt for funds with high credit ratings from reputed agencies to minimize default risk.
Finally, check expense ratios, as lower costs can lead to better net returns over time.