Fixed maturity plan is an immensely popular plan among the investors who invests a lot in the market to increase their wealth. The reason behind this is that a fixed maturity plan provides investors with triple indexation at the end of the year, which brings down their tax liability.
What is the Fixed Maturity Plan?
Fixed Maturity Plans are debt funds with closed ends, with a tenure that varies from 1 month to 5 years. With long term capital gain tax after three years of investment, fixed maturity plans of three years are one of the most demanded plans in the market at the moment. Fixed maturity plan is predominantly debt oriented with the prime objective of producing steady return over a fixed maturity period. This in return helps the investors to stay protected from any market fluctuation.
Benefits of investing in Fixed Maturity Plan
The two prime benefits that Fixed Maturity Plans generate are non-volatile interest rates and capital protection. The main reason behind this being that fixed maturity plans invest in debt instruments, which are extremely low risk in nature compared to other instruments in the market. Fixed maturity plan further provides its investor with low risk of capital loss as compared to equity funds. As the securities are held till maturity, FMPs are not affected by interest rate volatility.
Fixed Maturity Plans offer better tax returns than Fixed Deposits as well as liquid funds and ultra short term debt funds because they offer indexation benefits. Indexation helps to lower capital gains and thus lower the tax.
On a better note with triple indexation advantage, a fixed maturity plan provides its investors with the advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years. Besides this fixed maturity plan also comes with a lower expense ratio. With investment being held till maturity cost saving with respect to buying and selling of instruments, actually results in lower expense ratio.
Investments of Fixed Maturity Plans
Fixed maturity plan invest in the following marketing instruments
- Certificates of deposits
- Commercial papers
- Money market instruments
- Highly rated securities like ‘AAA’ rated corporate bonds
- Bank fixed deposits
All these investments made by the fixed maturity plan are subject to specified tenure of maturity.
Functioning of Fixed Maturity Plan
A fixed maturity plan portfolio consists of various fixed income instruments with matching maturities. Based on the tenure of the fixed maturity plan, a fund manager invests in instruments in such a way that all of them mature around the same time. During the tenure of the plan, all the units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return of the plan.
Points to Ponder Upon
Fixed maturity plan never invest in Equity fund
Fixed maturity plans are illiquid in nature.
Fixed maturity plan is a close ended secured investment, with predefined tenure, and offers high capital protection with low risk and huge tax benefit.
