Fixed Maturity Plans are staging a comeback in India as investors look for predictable, tax-efficient alternatives to fixed deposits. These closed-ended debt funds lock in money for a fixed tenure and invest primarily in high-quality bonds that mature around the same time. This structure helps FMPs deliver relatively stable returns with potential tax benefits, especially when held for the full term.

Key Takeaways

• Fixed Maturity Plans are closed-ended debt funds with predefined maturity dates that invest in debt instruments maturing around the same time.
• FMP returns are potentially higher than FDs due to professional management and the ability to invest in higher-yielding corporate debt.
• The primary drawbacks include limited FMP liquidity during the FMP lock-in period and exposure to credit risk.
• Fixed maturity plan investment strategy works best for conservative investors with specific time horizons and those seeking stable returns.
• Creating a ladder of FMPs with different maturity periods can help investors manage liquidity needs while maintaining the benefits of these instruments.

In this blog, we break down how FMPs work, why they are gaining traction again, and how they stack up against traditional options like FDs in terms of returns, risk, liquidity and taxation - so you can decide whether FMPs deserve a spot in your portfolio.

What Is A Fixed Maturity Plan?

A Fixed Maturity Plan is a close-ended debt mutual fund with a specified maturity date. Unlike open-ended funds, FMPs have a fixed tenure ranging from 1 month to 5 years. The fund manager invests in debt instruments like corporate bonds, government securities, and money market instruments that mature around the same time as the FMP itself.

The key feature differentiating FMPs from other investment options is their closed-ended structure with a predetermined maturity date. This structure allows fund managers to align the maturity of underlying securities with the plan’s maturity date, creating what industry experts call a “hold-to-maturity” approach.

Comparison With Fixed Deposits And Debt Funds

Before adding FMPs to your portfolio, it helps to see how they differ from familiar options like fixed deposits and open-ended debt funds in terms of returns, liquidity, risk and taxation. The table below highlights the key distinctions to help you make an informed choice.

How Do Fixed Maturity Plans Work?

Closed-ended Nature Explained

The closed-ended nature of FMPs is what makes them unique. They are available for subscription only during their New Fund Offer (NFO) period. After this window closes, you cannot invest in that particular FMP.

This structure allows fund managers to create a stable, predefined portfolio without worrying about sudden redemption pressures.

How Fund Managers Lock in Returns Through Debt Instruments

The fund manager creates a portfolio of debt instruments that mature around the same time as the fixed maturity plan maturity date. This “matching” strategy is what helps lock in returns.

For example, if you invest in a 3-year FMP, the fund manager will buy debt instruments that mature in approximately 3 years. The Fixed Maturity Plan NAV may fluctuate during this period, but at maturity, you receive returns based on the yield at which the instruments were purchased.

This helps minimise reinvestment risk and interest rate risk, two significant concerns in traditional debt investing.

Benefits And Risks Of FMPs

Predictable Returns and Indexation Benefits

• Predictable Returns: This is one of the fixed maturity plan benefits. Since the fund manager follows a buy-and-hold strategy, FMP returns are relatively predictable compared to other debt funds.
• Tax Efficiency: FMP taxation offers significant advantages. Held for more than three years, they used to qualify for indexation benefits, potentially making FMP post-tax returns higher than FDs. However, any investment done after 1st April 2023 does not qualify for indexation and is treated as per the tax slab rate.
• Professional Management: Expert fund managers select instruments after thorough credit analysis, reducing fixed maturity plan risk.
• No Interest Rate Risk at Maturity: Since securities are held till maturity, interest rate fluctuations don’t affect final returns.
• Low Expense Ratio: FMPs typically have lower expense ratios compared to open-ended debt funds.

Limited Liquidity and Interest Rate Risk

• Limited Liquidity: The FMP lock-in period means your money is essentially locked until maturity. While technically listed on exchanges, the FMP liquidity is often poor.
• Credit Risk: There’s always the possibility of default by the issuers of debt instruments in the portfolio.
• Indicative Yields: The returns indicated during the NFO are not guaranteed.
• Fixed Maturity Plan Exit Load: Early redemption, if available, usually comes with significant exit loads.

FMPs vs Bonds

While both target predictable income through fixed-income instruments, the right choice depends on how much control, flexibility, and tax efficiency you want versus the comfort of professional management and diversification.

Choose FMPs when:

• You prefer professional management
• You want a diversified portfolio
• You seek potential tax advantages
• You are comfortable with the FMP lock-in period

Choose Bonds when:

• You want more control over your investments
• You prefer knowing exactly which companies you’re investing in
• You desire more flexibility in entry and exit
• You are looking for potentially higher yields for taking concentrated risks

Bonds Available on Grip Invest for More Flexibility

Bonds available on Grip Invest offer greater flexibility with various tenures and risk profiles, making them an alternative to Fixed Maturity Plans for investors seeking more control. The platform provides transparent information about each bond offering, allowing investors to make informed decisions based on their risk appetite and investment goals.

Who Should Invest In FMPs?

Ideal for Short to Medium-term Conservative Investors

Fixed maturity plan investment strategy works best for:

• Conservative Investors: Those seeking relatively stable returns with moderate risk.
• Goal-Based Investors: If you have a financial goal that aligns with the FMP maturity date, these instruments can be perfect.
• Corporate Treasuries: Companies with surplus cash for specific time periods.

Tax Efficiency and Investment Horizon Considerations

The ideal investment horizon depends on your goals. FMP tax efficiency used to be a major reason for investors due to indexation. However, now, there are no such benefits. But you can still consider FMP for stable returns and diversification.

A typical fixed maturity plan investment strategy might involve creating a ladder of FMPs with different maturity periods to ensure periodic liquidity while maintaining relatively predictable returns.

Laddering Strategy With FMPs (Portfolio Planning Insight)

A laddering strategy with Fixed Maturity Plans (FMPs) is one of the most effective ways to generate predictable income while maintaining periodic liquidity. Instead of locking all your investment into a single long-duration FMP, laddering involves spreading your total funds across multiple FMPs with different tenures—say one, three, and five years.

This ensures that at least one FMP matures every year, providing liquidity and the opportunity to reinvest at prevailing interest rates.

How Laddering With FMPs Works

Let us say you have INR 6 lakh to invest. Instead of putting the entire amount into a 5-year FMP, you can divide it into three tranches:

• INR 2 lakh in a 1-year FMP
• INR 2 lakh in a 3-year FMP
• INR 2 lakh in a 5-year FMP

As the first FMP matures after one year, you can withdraw or reinvest that amount into a new 5-year FMP at the latest yield. Over time, you create a ladder of maturities that ensures consistent access to funds and maximizes returns with minimal interest rate risk.

Key Advantages Of An FMP Ladder

• Continuous Liquidity: One tranche matures periodically, giving you access to funds without premature withdrawals.
• Better Return Optimization: Reinvesting matured FMPs at current market yields can boost your cumulative returns, especially in a rising rate environment.
• Reduced Reinvestment Risk: Since only a part of your corpus matures each year, you avoid locking all funds at potentially low rates during downturns.
• Goal-Based Flexibility: Perfect for investors with staggered financial milestones like education, home renovation, or future obligations.

Conclusion

Fixed Maturity Plans offer a balanced investment option for those seeking predictable, potentially higher returns than traditional fixed deposits, along with tax efficiency. Ideal for investors with clear financial goals and defined time horizons, FMPs combine professional management, portfolio diversification, and disciplined wealth creation — making them a compelling addition to a conservative or moderately aggressive investment portfolio.

With platforms like Grip Invest, you can explore a curated range of FMPs and other fixed-income options, making it easier to invest confidently and efficiently.

FAQs On Fixed Maturity Plans

1. Are FMPs risk-free?

No, Fixed Maturity Plans are not risk-free. While they have lower risk compared to equity funds, they carry credit risk (possibility of default by debt issuers) and limited FMP liquidity risk.

2. How is income from FMPs taxed?

FMP taxation is simple. The gains, be it short or long term, are added to your income and treated as per your respective tax slab if you have invested post 1st April 2023.

3. Can I redeem before maturity?

While FMPs are technically listed on exchanges, FMP liquidity is usually limited. Early redemption often comes with a significant fixed maturity plan exit load and may not always be possible due to thin trading volumes.

4. Are FMPs better than FDs?

The FMP vs FD comparison depends on your requirements. FMPs typically offer potentially higher returns and better tax efficiency. However, FDs provide guaranteed returns and better liquidity. For conservative investors seeking slightly higher returns than FDs with a fixed investment horizon, Fixed Maturity Plans can be advantageous.

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