Who should invest in mutual fund fixed maturity plans?

The best part about mutual fund investments is that you can create a portfolio aligned with your risk tolerance. If you dread market volatility and want to create a conservative portfolio that gives you a fixed return, you can consider investing in mutual funds with a fixed maturity plan. Fixed maturity plans, popularly known as FMPs, are close-ended debt mutual fund schemes with a pre-defined maturity ranging from a few months to a few years. FMPs are a sound investment for people who want a risk-free return and can stay invested for a pre-defined tenure.

Here is everything that can help you decide if you should invest in mutual funds fixed maturity plans:

What are mutual funds fixed maturity plans?

Mutual funds fixed maturity plans (FMPs) are close-ended debt schemes, which primarily invest in fixed income securities, including certificate of deposits (CD), commercial papers (CP), non-convertible debentures, money market instruments, corporate bonds, treasury bills, etc. These mutual fund schemes have a pre-defined lock-in period and a restricted investment window. FMPs lock in the rate of interest and offer a fixed return at maturity. Generally, the maturity tenure varies from 30 days to 5 years.

If you invest in an FMP for three years or more, you also get the benefit of long-term capital gains. The tax benefits and the lock-in of the interest rate are two of the most beneficial reasons for investing in mutual funds fixed maturity plans.

What are the features and benefits of mutual funds fixed maturity plans?

1. Fixed tenure: FMPs come with a pre-defined fixed maturity period ranging between 30 days and five years. You can choose a mutual fund FMP that suits your investment horizon. Investments in FMPs are fixed and cannot be withdrawn.
2. Close-ended funds: FMPs only have a limited investment window, implying you can buy this mutual fund only during the initial offer period and redeem the scheme at maturity. In some cases, you can exit the mutual fund scheme before its tenure expiry.
3. Low-risk:FMPs invest in debt securities, such as CD, CP, treasury bills, corporate bonds, money market instruments, etc. These securities offer a fixed rate of return and predominantly consist of high-rated credit securities, ensuring a low risk of default. As an investor, you know your interest return in advance.
4. Tax benefits: FMPs are also beneficial for high-income tax bracket investors. Investing in these mutual fund schemes for more than a year allows you to benefit from indexation in long-term capital gains. You can make higher returns than a fixed deposit (FD) at a much lower tax rate than FDs.
5. Stability of income:FMPs lock in the interest rate, safeguarding you from any interest rate fluctuations. Hence, you know the precise returns from the mutual fund scheme.

Who should invest in mutual fund fixed maturity plans?

As an investor, you can invest in an FMP if you do not want to take a high risk and desire fixed but better returns than a fixed deposit. However, these investments are not 100% safe. The net asset value (NAV) of these mutual fund schemes varies with interest rate fluctuations and other macroeconomic factors. Moreover, FMPs have a fixed lock-in period and no provision for early withdrawal. Hence, if you can stay invested for a fixed term, FMPs are a good investment option for you.

You can invest in FMPs via lump sum mode or SIP (Systematic Investment plan). Invest and monitor your FMPs conveniently through the advanced Tata Capital Moneyfy app.