FMPs are also called fixed term plans or fixed tenure plans. They are closed end debt mutual funds. These funds lock investments into debt instruments that broadly mature at the same time as the fund itself. Assets of these schemes are a mix of government securities and corporate debt - mainly commercial paper, certificates of deposit from banks and debentures.
Fixed maturity plans are usually offered for tenures (holding periods) of three months to just over a year; tenures of 30 days and 370 days are common. But in recent times, fund houses have rolled out FMPs for periods as varied as 35 days, 120 days, 270 days and 25 months. These may be convenient for investors who have funds to park for such tenures and do not wish to lock into standard one- or three-year terms offered by banks.
While short-term FMPs (1 year or less) are usually pure debt plans, a few fund houses offer longer term fixed tenure plans for three- or five-year, that combine a small equity exposure with debt. The higher return potential on such FMPs comes with a higher risk profile though.
Recent changes in regulation by SEBI make FMP a safer bet. The more significant changes are:
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Currently FMPs are not allowed to provide indicative yields to investors.
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FMPs are close ended and are not allowed to repurchase units from investors. Earlier too the FMPs were also close ended but they provided exit windows to investors.
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After struggling to meet redemption pressures during 2007-09 and being singed by rescheduled repayments from borrowers, managers of FMPs have gone all out to ensure higher credit quality in their portfolios - even if this entails a sacrifice on returns. FMP portfolios have also become more diversified with no concentration of exposure to one or two issuers, as was the case in 2008. Fund houses also provide monthly disclosures of portfolios to enable monitoring by investors.
Benefits of Investing in FMPs
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Tax-efficiency: One factor that enhances the appeal of FMPs for investors in the higher tax brackets is their tax efficiency relative to bank or corporate deposits.
Interest received from bank or corporate deposits are usually subject to tax at the investor`s marginal rate of tax, which can range from 10 to 30%.
FMPs are subject to Dividend Distribution Tax of 12.5% and 10% capital gain tax without indexation or 20% with indexation. These rates are less than tax on bank FDs .i.e. 30%. -
As FMPs are passively managed funds, the portfolio turnover will be low resulting in lower transaction costs which enhances the returns for the investor. FMPs may have certain restrictions imposed in their portfolio construction based on offer terms. For instance, it might only invest in securities with an AAA credit rating or may not invest in debt issued by borrowers from a certain sector. Some FMPs include equity exposure in the form of convertible debentures.
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FMPs offer a lower risk option to investors than some of the fixed deposit from corporates. FMPs spread their portfolios over several corporate borrowers; diversification across issuers and sectors also lowers the risk to the investor.
Conclusion: FMPs can be recommended to risk averse clients and to those looking to earn tax-efficient returns.