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Interval Fund vs Fixed Maturity Plan

How is an Interval Fund different from a Fixed Maturity Plan? Read this article to know the key differences between Interval Funds and Fixed Maturity Plans.

What is an Interval Fund?

An interval fund is a type of mutual fund which is not listed on the stock market or secondary exchanges. The units of an interval fund can be redeemed only during specific redemption periods.

Features of Interval Fund

Here are the key features of Interval Funds:

  • Cost - The expense ratio of an interval fund is higher than a mutual fund
  • Risk - It has low-risk as the underlying predominant fund primarily invests in debt securities
  • Asset Allocation - Although an interval fund primarily invests in debt securities, there are other variants of an interval fund which invests in debt as well as equities
  • Liquidity - Interval funds do not provide much liquidity to an investor. The units of an interval fund can be purchased/sold
  • Taxation - Taxation of an interval fund depends on the underlying invested asset (equity or debt). If 65% of the investment is in equity, it is taxed like an equity mutual fund. If there is more debt to equity ratio, it will be treated as a debt fund

What are Fixed Maturity Plans?

Fixed maturity plans are close-ended mutual funds; the investment can be made only during the time of a new fund offer. Fixed maturity plans primarily invest in debt instruments and offer a predictable rate of return. In addition to this, FMP’s are tax-efficient against the instability of interest rates.

Some of the underlying assets of aFixed Maturity Plan are certificates of deposit or bonds. The tenure of these assets varies from thirty days to five years. The most commonly available tenures range from thirty days to 180 days, 370 days and 395 days.

Key Features of Fixed Maturity Plans

Here are the key features of Fixed Maturity Plans:

  • Fixed Tenure - Fixed Maturity Plans come with a fixed tenure. The investments made in FMPs are fixed and cannot be withdrawn until they mature. In case of an NFO, an investor can choose a plan that suits their investment horizon and their cash flow needs.
  • Redemption Under a Close-ended Mutual Funds the units can be redeemed only at the time of maturity of the fund on the specified date.
  • Type of Investment - Fixed Maturity Plans primarily invest in commercial papers (CP), certificate of deposits (CD), corporate bonds, money market instruments, government-issued securities, and non-convertible debentures (NCD).
  • Taxation Benefit - Investors can benefit from indexation to leverage their tax liability against inflation. Triple indexation gives investors the advantage of indexing their investment to inflation for four years.
  • Credit Risk - The risk of liquidity is minimal in Fixed Maturity Plans.

Interval vs Fixed Maturity Plan

There are no significant differences between an interval and a fixed maturity plan. An interval fund is similar to a fixed maturity plan because your investment is subject to a fixed tenure (you cannot redeem the investment before maturity). In an Interval Fund, you can redeem units at regular/specified intervals during the tenure of the fund. Unlike a Fixed Maturity Plan, you have to wait until maturity.