of Fixed Maturity Plans (FMPs) have been launched by fund houses in the
recent months. These offerings clearly indicate that the FMPs which
were once exclusively reserved for Corporate and High Net-worth
Individuals (HNIs) are now competing
with traditional Fixed Deposits (FDs) for retail investors’
money. With lower risk as compared to equities and other debt funds,
FMPs as a portfolio construction tool are often a viable product. In
this article, we discuss FMP as an investment avenue, its pros and
cons, compare it over Fixed Deposits and understand why investment into
FMPs makes sense in current scenario.
FMP as the name suggests is a mutual fund which has a fixed maturity
period and invests in fixed income instruments like bonds, government
securities, money market instruments etc. There are a few FMPs which
also invest a small portion of their corpus in equities but they are
exceptions to the rule. The tenure could be 30, 90,180, 365 days or
more and they invest only in such securities that mature on or before
the date of the maturity of the scheme. For instance, an FMP with
tenure of 370 days will invest only in papers maturing within 370 days
or less and hold them till maturity.They are closed ended funds and are
listed on stock exchange.
Hence, premature withdrawal is only possible through selling on the
exchanges or on maturity the units can be directly redeemed from the
and Cons of FMP
The returns generated from FMPs if held for more than a year, are taxed
as capital gain (10% without indexation and 20% with indexation)
instead of marginal tax rate which could be as high as 30%. Also, FMPs
enjoys double indexation benefit if held for two financial years. For
e. g., suppose an investor invests in a 14 months FMP in the month of
March, and holds the same till maturity i.e., till April next year, he
would get the advantage of indexing his investment to inflation for two
Low volatility: FMPs
invest in papers in line with maturity of the scheme and hold the same
till maturity; hence they do not carry interest rate risk and provide
stable returns with low volatility.
FMPs also suffer from certain limitations.
Less liquid: They cannot be pre maturely redeemed
from fund houses and the only exit option is to sell them on exchanges,
where FMPs do not have enough liquidity.
Less transparent: The
returns are neither guaranteed and nor it is known in advance with
reasonable certainty. The portfolios of FMPs are also not known before
investment and as a result, fund managers may invest in low quality
papers to attract higher yields at higher risk. In other words, the
investment mandate is not as definitely spelt out as in other mutual
are generally used by large investors and companies as an alternative
to FDs. Though FMPs do not guarantee any returns, the indicative
returns are based on the returns of similar duration bonds available in
main advantage of investing in FMP as compared to FD is tax arbitrage.
For individuals that fall in the highest tax bracket and corporates,
the interest on FDs is taxed at 30%. But, if FMP is held for more than
1 year and the investor chooses to treat all the gains as capital gain
then he or she will be taxed at 10% without indexation and 20% with
indexation. Even if the investment horizon is less than a year,
investors can choose the dividend payout option where dividend
distribution tax will be at 14.22% for individuals and 22.66% for
us compare the yield for an investor who invests in an FMP versus an
FD. Assume that both give a return of 7% for a one-year plan.
As we can see in the table, even
though the pre-tax rate of both the products is same, on post tax
basis, the FMP yields 1.4% higher than FD. On the contrary, if FD has
to give the same post tax return as FMP, the former has to give pre-tax
return of 9%.
of FMP over years
having enjoyed great popularity among investors for some years till
2007, FMPs went through a rough phase in the second half of 2008 and
2009, but now the product is coming back on the radar of investors.
we can see from the above chart, from August 2004 to August 2007,
Assets under Management (AUM) of FMPs went up from INR 4,477 crores to
INR 67,962 crores. Due to the liquidity crisis in October 2008 and the
subsequent regulatory changes, the AUM of FMPs fell to INR 33,966
crores in 2009. However, with several
rate hikes by the RBI and
short-term papers trading at attractive levels, FMPs are now garnering
fresh investments again and the overall AUM for FMPs has reached INR
65,484 crores in August 2010.
addition to this, around 342 FMPs have
been launched in the calendar year 2010 as
compared to 76 FMPs in the
of 2008 and Regulatory changes
October 2008, when
the stock market went into a freefall, FMPs faced a huge credit crunch
as several risk-averse investors wanted to redeem their FMP investments
prematurely. Due to poor quality of papers and illiquidity in the debt
market, few fund houses had to put a cap on the FMP redemptions. Also,
due to the liquidation pressure on close-ended funds, RBI instituted a
term repo facility for an amount of INR 60,000 crores to enable banks
to ease the liquidity stress faced by Mutual Funds (MFs) and
Non-Banking Financial Companies (NBFCs).
this, SEBI announced measures to resolve the liquidity problem faced by
mutual funds. It banned premature withdrawals in new FMPs launched by
Mutual fund houses and compulsory listing of all close-ended products.
This meant that even if investors wanted to get out of FMPs in spite of
the costs of the exit penalties, the regulator ensured that the
investors either sell the units on exchanges or wait till the FMPs
matures, rather than asking for an early redemption.
SEBI banned the practice of FMPs declaring indicative future yield and
displaying indicative portfolios in advance. Presently, AMCs have to
disclose the portfolio of such schemes, once the issue has closed and
on a monthly basis on their respective websites.
With all these measures, the industry did see some stabilization of AUM
account of high
inflation and reasonable growth, RBI has started tightening the
and raised policy rates. As a result, we have seen yields on debt
up in the last few months. This makes FMPs attractive investment avenue
investors in the mutual fund space, who are looking to park money in
into account the current
scenario of tighter regulation and
tax arbitrage, we are of the view
provide an attractive investment option. With yields at such high
could be a wise call to lock some
portion of your fixed income
investors should keep in mind
that liquidity is negligible in FMPs so the investor’s
should be in line with maturity of the scheme. For the final call on
of an FMP, an investor should look at
the portfolios and the track
the previous FMPs launched by the fund house.
To invest in FMPs click