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Fixed Maturity Plans, are investments done in fixed income schemes like bonds, Commercial Papers etc. Fixed Maturity Mutual Fund Plans are basically close-ended mutual funds with a fixed tenure which can range from 30 days up to five years. The most preferred tenure is 30 days to 180 days and 370 days to 395 days. The Fixed Maturity Plans cannot be withdrawn or closed before completion of maturity. They also come with a pre-defined interest rate and thus help the investor calculate how much returns they can expect after maturity. Fixed Maturity Plans are low-risk investment plans as they do not depend on the capital market fluctuations for their interest earnings. Also, due to their close-ended nature, one cannot invest in these Mutual Funds at any time. Money can be invested when the Mutual Fund is announced and open. Thus, this makes it a simple and efficient investment tool.
Fixed Maturity Plans are not the regular Mutual Funds and have certain distinct features. Continue reading to understand the various features of Fixed Maturity Plans.
The tenure of a Fixed Maturity Plan is pre-decided and disclosed before opening the fund. Investors can choose the plan if the tenure suits their investment needs. Once the Fixed Maturity Plan is closed, the money cannot be withdrawn and neither can more money be invested in the plan. Thus, it is very important to know the tenure of the fixed maturity plan before investing in it.
A fixed maturity plan is close-ended in nature, which means that the option to invest is available to investors only when the fund is announced and during the initial offer period. After closing of the fund, no further investments can be made, and the money can be redeemed only after completion of the fixed tenure. It is difficult to withdraw or close the fund in between, but an investor who holds the units of the plan in the form of Demat units can sell them on the stock exchange where fixed maturity units are transacted and move away from the fund.
The interest rate declared on a fixed maturity plan is not impacted by market fluctuations as the money is invested in debt instruments. Also, the interest rate is declared at the initiation of the fund. This helps the investors to calculate their actual total return on investment at the end of the fixed tenure and can invest accordingly.
A fixed maturity plan scheme invests in debt instruments like bonds, Commercial papers, T-Bills, government-issued securities etc. The maturity of the plan is in accordance with the maturity of the debt products. As the plan invests in debt instruments, it is unaffected by market ups and downs and earns a constant rate of return on its investments.
One of the major advantages of investing in a fixed maturity plan is that when the plan is for a tenure longer than one year, the investors of fixed maturity plan can reap the benefits of indexation. They can use indexation as a tool against inflation to reduce their tax liability.
A fixed maturity plan invests in only highly rated debt instruments, which significantly reduces the risk of default of these instruments keeping the investments safe. Moreover, after the completion of tenure, the investment along with its interest return is easily redeemable, and there is no liquidity risk.
Investors tend to either invest in equity or debt funds when it comes to Mutual funds. For regular debt funds, money can be invested at any time, and if no consultation is sought, investors might apply in the wrong debt funds. With a fixed maturity plan, the investor is assured that their investments are safe and with only highly rated debt instruments. This fixed maturity plan tends to bring about a balance in the mutual fund portfolio of an investor.
Now that we understand the features of a fixed maturity plan, it is important to know the main objective behind setting up a fixed maturity plan.
The main objective of a fixed maturity plan is to create a continuous return on investment for a fixed tenure. These plans are not available for investment throughout the year and can be invested in only when a New Fund Offer (NFO) is declared. The NFO is kept open only for a short period of time with a definite opening and closing date. Post expiry of the closing date, no further investments can be made in the plan. The fixed maturity plans generate a constant rate of return and are not impacted by market fluctuations, which means that a fixed maturity plan is a low-risk investment.
A fixed maturity plan might sound similar to a fixed deposit where a lump sum investment is made for a fixed tenure and with a pre-defined interest rate, but in reality, a fixed maturity plan is quite different from a fixed deposit. Let us see the main differences between the two forms of investment are.
In a fixed maturity plan, the return on investment is guaranteed and can be pre-calculated as the tenure and interest rates are fixed. For a fixed deposit scheme, the returns on the deposit vary depending upon the period of investment chosen as the interest rates tend to change.
Fixed maturity plans cannot be redeemed before completion of the tenure and thus are not very liquid. On the other hand, a fixed deposit, albeit made for a fixed tenure, can be broken in emergency cases. A penalty is charged on the total deposit amount, thus making fixed deposits slightly more liquid than fixed maturity plans.
For fixed deposits, the interest income is liable for tax deduction as per the prevailing tax slab making them less attractive. On the other hand, returns on fixed maturity plans need to pay capital gains tax, but if the fund is held for more than three years, the investor can use indexation against inflation to reduce their tax liability.
The tenure of a fixed maturity plan is different for each scheme and can range from 30 days to 180 days and even more. The most preferred tenure is three to four years. On the other hand, a fixed deposit can be held for a minimum of seven days to a maximum of ten years, and the rate of interest varies according to the tenure.
The fixed maturity plans are a great option for those looking for a low-risk investment with a fixed rate of return, but they do come with certain drawbacks.
Fixed maturity plans are not very liquid as they cannot be redeemed before the completion of the maturity period. In extreme cases, the units of a fixed maturity plan can be sold on the stock exchange, but it is necessary to have a Demat account to do so.
The interest rates on fixed maturity plans are pre-declared and remain the same throughout the tenure. This is good when the market rate is low, and the fixed maturity plan provides more. But in cases where the market interest rates are increasing, then the investor might feel short-changed as they earn at a rate that is lower than the market.
Below is a list of best fixed maturity plans as on August 2019.
|Fund name||Min. Investment (Rs.)||Launch Date||Close Date||Tenure||Maturity Date|
|SBI Fixed Maturity Plan - Series - 15 - 1123 Days - Regular Plan - Dividend||5,000.00||30-07-2019||05/08/2019||1123.0 Days||01/09/2022|
|SBI Fixed Maturity Plan - Series - 15 - 1123 Days - Regular Plan - Growth||5,000.00||30-07-2019||05/08/2019||1123.0 Days||01/09/2022|
What is a Fixed Maturity Plan?
Fixed maturity plans are closed-ended investment schemes where lump sum money is invested in debt funds for a fixed tenor and pre-declared interest rate. The fixed maturity plan cannot be redeemed before the maturity period is over and thus are not very liquid. The fixed maturity plans can start from a period of 30 days or a month up to 3-4 years. After completion of maturity, the investor does get a choice of re-investing the money in another fixed maturity plan for a fixed tenor.
How does a Fixed Maturity Plan work?
A fixed maturity plan does not allow continuous investments and money can be invested only when the New Fund Offer is launched up till its closing date. Once the money is invested, the tenor and interest rate are informed to the investors. The investment pool is now further invested in highly rated debt instruments like T-Bills, government securities, certificate of deposit, commercial papers etc. At the end of the maturity, the initial investment, along with the earned rate of return, is handed over to the investor.
Are Fixed Maturity Plans better than Fixed Deposits?
Both fixed maturity plans and fixed deposits have many features in common like fixed tenures, but the choice of investing in fixed maturity plan or fixed deposit lies with the investor. If the aim of investing is to earn a higher rate of returns and also be able to withdraw money if required, then fixed deposits are a better option. On the other hand, if the investor is looking for a steady rate of return and does not need immediate liquidity, then the fixed maturity plans are more beneficial. Another major advantage of opting for fixed maturity plans is that the returns on the plan are categorized as capital gains and if the plan is for more than three years, the gains can be indexed against inflation to reduce the tax burden. As per the prevailing IT slabs, the interest income earned on fixed deposits is taxable.
Is Fixed Maturity Plans a Good Investment?
Fixed Maturity Plans are a good investment for people who have lump sum money to invest and do not have any immediate liquidity concerns, Also, if the investors prefer low-risk investments with guaranteed returns, then fixed maturity plans are a good investment option. But there are cases when the interest rate on the fixed maturity plan is less as compared to the market interest rate and the investor tends to miss out on the opportunity to earn more via a fixed deposit or equity fund. Thus, if the market interest rates are looking to decrease, then it is the best time to invest in a fixed maturity plan as it would give a rate of interest higher than the market.
Are Fixed Maturity Plans Taxable?
Yes, fixed maturity plans are taxable, but if the plan is held for longer than three years, the investors can use indexation to leverage their gains against inflation and reduce their tax burden. Fixed maturity plans are better than fixed deposits, mainly in terms of taxation as income earned on fixed deposits is taxable under the IT slab.
Can the Fixed Maturity Plans Be Invested for Longer Than the tenure?
No, the tenure of the fixed maturity plans is fixed, and once the tenure is over, the money along with interest returns are given back to the investors. However, a few mutual funds do offer a ‘Rollover’ where after the end of the tenure, the investor can choose to re-invest the money in another fixed maturity plan with a different yet fixed tenure.
What are the major debt instruments where the money is invested under a Fixed Maturity Plan?
The major debt instruments where the money is invested under a fixed maturity plan are T-Bills, Government Securities, Repo and Reverse Repo Instruments, Certificate of Deposits, Commercial Papers, Non-Convertible Debentures, Securitized Debt Instruments etc. Fixed Maturity Plans are offered by various banks and funds, each with their own rate of return. It is recommended that the investor studies the market before investing in a particular Fixed Maturity Plan.