Fixed Maturity Plans

 A fixed maturity plan (FMP) is a closed-ended debt scheme, wherein the duration of debt papers is aligned with the tenure of the scheme. So a one-year FMP will invest in debt instruments that mature in one year or just before this period. This synchronized maturing minimizes the interest rate or reinvestment risk and thereby benefit from the interest rates accrual to the fixed tenure. Ideal for investors looking for investing for a fixed time period and minimize the interest rate risk on their investments.

What are the benefits of FMPs?

Capital Protection FMPs provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.

Better Returns FMPs offer better post-tax returns than FDs as well as liquid and ultra short-term debt funds.

Less Exposure to Interest Rate Risk – As the securities are held till maturity, FMPs are not affected by interest rate volatility.

Tax Benefit FMPs score over fixed deposits because of their tax effectiveness both in the short-term and long-term.

Lower Cost Since these instruments are held till maturity, there is a cost saving with respect to buying and selling of instruments.

Double Indexation Benefit Indexation helps to lower capital gains and thus lower the tax. Double indexation allows an investor to take advantage of indexing his investment to inflation for 2 years while remaining invested for a period of slightly more than 1 year.

How do FMPs work?

A portfolio of FMPs consists of various fixed income instruments with matching maturities. On the basis of the tenure of the FMP, a fund manager invests in instruments in such a way, that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan.

Who should invest in FMPs?

  • Investors looking at stable returns over the medium-term
  • Investors who are not pleased with returns from traditional fixed income avenues like Bank deposits, Bonds etc.
  • Investors who want to invest money for a fixed tenure to meet certain financial goals in the  future
  • Investors with a conservative and risk averse profile
  • Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income

 Where do FMPs invest?

FMPs usually invest in certificates of deposits (CDs), commercial papers (CPs), money market instruments, highly rated securities (like ‘AAA’ rated corporate bonds) over a defined investment tenure and sometimes even in bank fixed deposits.

 

What is the difference between FMPs and bank fixed deposits (FDs)?

Returns – FMPs are the equivalent of a fixed deposit (FD) in a bank. While, the maturity amount of a fixed deposit in a bank is guaranteed, the maturity amount of an FMP is not guaranteed.

Duration of Investment – FMPs invest as per the tenure of the Scheme i.e ranging from  1 month to 3 years. FDs on the other hand have an investment horizon of 15 days to 10 years.

Taxation – In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab. If you invest in the growth option of an 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 an FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation.

Why should one invest in FMPs?

Fixed Maturity Plans provide the below given benefits:
    • Lower interest rate risk as it predominantly invests in debt securities matching the maturity of the plan
    • Tax efficient returns as compared to interest income from Fixed Deposits for investors falling in higher tax brackets
    • Indexation benefit for investments of more than 1 year
However, FMP’s are close-ended funds hence, one needs to consider their liquidity needs before investing in FMP’s. FMP’s are listed on the stock exchange and can be traded on the exchange platform.
Particulars Fixed Deposits Debt Fund returns without indexation Debt Fund returns with indexation
Amt Invested 100000 100000 100000
Annualized return* 10.00% 10.00%^ 10.00%^
Total value at maturity 1,33,100 1,33,100 1,33,100
Initial cost of acquisition 100000 100000 100000
Gains on investment 33,100 33,100 33,100
Indexed cost of acquisition NA NA 134810
Taxable income 33,100 33,100 0#
Applicable tax rates 30.90% 10.30% 20.60%
Tax liability 10228 3409 0
Post Tax return 22,872 29,691 33,100
Post Tax return (%) 7.11% 9.05% 10.00%

*Returns are assumed at 10% across the product to show the impact of taxation on capital gains from Debt mutual funds and income from Fixed Deposits

Cost Inflation index for last 3 years:
2012-2013 852
2011-2012 785
2010-2011 711
Assuming the investments are for 3yrs starting the financial year 2010-11
^ Gross return before expenses. Interest calculation is assumed on yearly cumulative basis. The tax rate is assumed at the highest rate based on the current tax slabs. Please consult your tax advisor for tax implication & further details. Interest rate on Fixed Deposits and Debt Funds is assumed as 10% for the purpose of calculating Annualized Returns and the actual returns may vary depending upon the prevalent market conditions and rates. Applicability of any change in income tax rates may affect post tax returns significantly.

Cost Inflation Index is based on CII for the investment year and the year of redemption (Year of redemption -2012-2013 – CII=852, Year of investment 2010-2011 – CII=711).

# Taxable income is Zero as the Indexed Cost of Acquisition Rs. 1,34,810 is greater than the maturity value of Rs. 1,33,100.

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