June 07 , 2012
What is a fixed maturity plan (FMP)?
A fixed maturity plan (sometimes called Interval Fund) is a debt mutual fund, with a fixed investment date and a maturity date. Unlike other mutual funds, it does not accept subscriptions on an ongoing basis. Similarly, there is a defined maturity date when the principal and gains are redeemed back to the investor's account. The plan cannot be withdrawn in the interim.
A fixed maturity plan is very much like a fixed deposit. Due to a quirk of Indian regulation, an FMP cannot disclose the yield (interest rate) upfront. However, in general, you can expect them to be equal to, or slightly higher than, the prevailing fixed deposit rate.
Advantages of a fixed maturity plan
The biggest advantage of a fixed maturity plan is that it is taxed less than a fixed deposit. If you are investing for any period more than a year, you will have only a 10% tax on FMP. But for interest from a fixed deposit, you will be taxed based on your overall income for the year (say 20% or 30%).
Limitations of a fixed maturity plan
A limitation of FMP is that an FMP cannot disclose the yield upfront. This regulation, introduced in 2008, has made several investors refrain from investing in FMPs altogether. However, we believe this concern is overdone. Even if you do not know the exact yield, you do know that it is likely to be equal to, or even slightly better than the prevailing fixed deposit yield.
The second limitation is that it offers no flexibility of interim withdrawal. For this reason, you should opt for FMPs only if you are sure you do not need this money before its due date.
Is a fixed maturity plan for me?
If you have a definite commitment coming up in the next 2-3 years time, an FMP is the best place to put your money. After all, equities are too risky for such a short term. And an FMP will get you better returns than almost any other debt instrument.
Examples of such commitments include:
- Your son's higher education commitment, coming up in exactly two years
- Your retirement - the date for which is 18 months away
FMP works best if the commitment date is well known.
How do I choose my fixed maturity plan?
FMPs are chosen in a very different way compared to all other mutual funds. This is because they open only for a day or two. Following this sequence of steps:
- There is no point doing prior research. Wait till you have the corpus at hand
- Explore the websites of major funds houses (HDFC, Reliance, Franklin, ICICI Prudential and Birla).
- Among these, see which tenures match your requirement best. Remember, an FMP is not a good idea if you are not sure when you will need the money
- Choose the best match, download the form, look for the opening date, and invest the money that day