Fixed Maturity Plans: Better than Fixed Deposits?

When it comes to making investments, investors have to be extremely prudent about where their funds are going to be kept. Which financial instrument would be a better option than the other for both short-term and long-term goals? Fixed deposits have been known to be the top most favourite amongst investors for long term investment. However, this is wrong!

Fixed maturity plans (FMPs), launched by various mutual funds are known to give higher and better returns than Fixed Deposits. So what are fixed maturity plans (FMPs)? Known to be closed-ended Mutual Fund schemes, which have a pre-defined maturity, these investment options have their primary objective to generate steady returns over a fixed period. This period may be from one month to even five years.

They are a mutual fund scheme that has a maturity date and the fund manager will invest in different bonds or other fixed income instruments that mature before the maturity of the scheme. It is very similar to a fixed deposit, but it is not the same. Although they don’t ensure guaranteed returns, or offer liquidity of the schemes, there is the possibility of earning tax free returns that are due to double indexation benefit (which is available for some FMPs). There is a minimum interest rate risk and credit risk, making it a preferred option for most fixed income investors.

The investments made in FMPs are known to mature before the maturity of the scheme. Therefore, there is no interest rate risk that investors have to be exposed to. The very fact that these investment options are tax-efficient automatically makes it a better option, where returns are higher.  However, premature withdrawals are not permitted as is the case for bank Fixed Deposits. Bank deposits are also known to come with deposit insurance (for a holding of up to Rs 1 lakh); there is no such similar facility for FMPs.  

FMPs are especially known to shield (protect) investors from the fluctuations in interest rates by investing in a portfolio of debt securities. Some of these include debentures, certificates of deposits and commercial papers. Their tenors have to match that of the scheme. At the end of the FMP term, these securities can be redeemed. For instance, these funds are good only if the investor will remain invested until the time of maturity. If an investor cannot do that, it might not be a better option than fixed deposits.