Fixed Maturity Plans Explained!

Most debt mutual funds do not have a lock-in period. For this reason, managers have to maintain the cash flows & liquidity of the fund. Consequently, they may not allocate investments optimally to maximize returns. Fixed maturity plans, on the other hand, bypass this limitation.

These debt-oriented schemes (FMPs) are good choices for investors who have a low-risk appetite and seek predictable returns. Keep reading to cultivate more knowledge about fixed maturity plans.

What Are Fixed Maturity Plans?

Fixed maturity plans (FMPs) are closed-ended debt funds and they have a fixed lock-in period. FMPs invest in a portfolio of debt securities like corporate bonds, commercial papers, non-convertible debentures, treasury bills, certificates of deposit etc.

How Do Fixed Maturity Plans Work?

The fund manager carefully constructs the investment portfolio of debt securities that align with the predetermined maturity date of the scheme. Afterwards, the scheme is launched through NFO (New Fund Offering) for subscriptions.

Investors can subscribe to the scheme during NFO. FMPs do not allow new investments after their initial subscription period is closed.

Maturity Period: Different Fixed Maturity Plans come with different maturity periods. It can range from a few months to several years. FMPs specify the maturity date when they launch a new scheme.

Features & Advantages

Let’s look at the features and advantages of fixed maturity plans to understand them more deeply.

1. Lock-In period

These schemes come with lock-in periods. It refers to a specific duration during which an investor cannot sell or redeem their investments. Hence, these schemes are not suitable for investors who want liquidity.

2. closed-End Scheme

Close-ended investment schemes have a fixed maturity date or target amount. They have a fixed number of units for sale. Additionally, they do not allow the creation of new units for investment.

3. Predictable Returns

Fixed maturity plans can generate predictable returns. This is because they invest in high-quality fixed-income securities for a fixed duration. However, FMPs generate lower returns than equity funds.

4. Low risk

Being debt-oriented schemes, fixed maturity plans carry lower risk than equity-oriented schemes & many other debt schemes. However, investors should check the credit ratings of any schemes before investing.

[ Must Read: GILT Funds ]

5. Low Volatility

Fixed maturity plans show lower volatility than other types of investments due to investments in debt securities and having a fixed maturity period.

Limitations

Everything has some limitations and so do FMPs. Give a read below.

A. Lack of Liquidity: FMPs do not allow an investor to redeem their investments before maturity. This means they cannot access their funds in an urgent need. While investors can sell their investments in the secondary market, prices may be subject to market fluctuations.

Do you know about liquid funds?

B. No Diversification During Tenure: FMPs maintain a fixed portfolio throughout the tenure. This prevents the scheme from benefiting from changes in market conditions or new opportunities during the tenure.

C. Interest Rate Risk: FMPs are susceptible to interest rate risk. If interest rates rise after you invest in an FMP, the value of the investment portfolio may fall. It can negatively impact your returns.

Key Points to Consider

The following points may help you make informed investment decisions in Fixed Maturity Plans.

1. First, consider your financial goals & plans
2. Check if FMPs align with your goals
3. Decide your investment time horizon
4. Check credit ratings of schemes you are interested in
5. Be aware of the expense ratio and exit loads.

Final Thoughts

The content provided is for informational purposes and readers should consult with a financial advisor or conduct their own research before making investment decisions.

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