Fixed Maturity Plans (FMPs): Attractive destination in today's scenario to park your funds.

When interest rates start going up, investors seek options that will give them good returns. FMPs are schemes that invest in fixed income instruments, like certificate of deposits, commercial papers, money market instruments, corporate bonds, debentures of reputed companies or in securities issued by government of India and fixed deposits selected by the fund manager. The basic objective of a FMP is to generate steady returns over a fixed period. Thus, investors are assured of returns if they stay invested in these products for the entire period.

Since these products are of different maturities, investors have the option of buying schemes that suit their requirements. These have lower risk of capital loss due to their investment in debt and money market instruments and are least exposed to interest rate risk as the fund holds the instruments till maturity getting a fixed rate of return. Here, fund managers primarily invest in AAA, P1+ or such kind of good rated credit instruments with maturity profile of the securities in line with the maturity of the plan so there is also low credit risk with minimal liquidity risk involved. Since the instrument is held till maturity, there is a cost saving in respect of buying and selling of instruments.

Take adequate care to ensure that you invest in a FMP whose maturity period matches your anticipated liquidity requirement. FMPs are also listed on the stock exchanges and can be sold prior to maturity as well. However, liquidity of these schemes could pose a problem while trying to exit before maturity.

Tax Treatment:


Short term FMPs are taxed at the marginal tax rate applicable to you as an individual. In case of long term FMPs, the lower of 10% (without indexation benefit) or 20%(with indexation benefit) will be applicable as tax. Indexation is a technique to adjust income payments by means of a price index and is calculated using 'Cost Inflation Index'(CII). CII numbers are released by the government every year. Because of the indexation benefit on long term FMPs, FMPs are favoured by many investors vis-a-vis Fixed deposits, where the gains are taxable at the applicable marginal tax rate.