Mutual Fund: You've heard of SIP, but what are Mutual Funds (FMPs)? Learn how they can be profitable..
Another excellent option for these investors is an FMP, or Fixed Maturity Plan. You may not have heard much about it, but it can become an important part of your investment portfolio, especially during market volatility. Let's learn about FMP today, what it is, how it works, and how it can be a profitable deal for you.
What is an FMP (Fixed Maturity Plan)?
An FMP is a type of closed-ended debt mutual fund that invests in debt instruments. 'Close-ended' means that you can invest in it only within a fixed time frame. Once that period ends, you cannot make new investments. Meanwhile, 'debt mutual fund' means that this fund invests its money in fixed-income instruments rather than investing directly in equities in the stock market. This includes options like government bonds, corporate bonds, money market instruments, and debentures.
Another key feature of an FMP is that it has a fixed maturity date. This maturity date can range from a few months to a few years, such as 6 months, 1 year, 3 years, or 5 years. The fund house announces in advance when the fund will start and end. As soon as the maturity date arrives, investors receive their investment and the returns earned on it.
How does an FMP work?
When a fund house launches an FMP, it collects funds for a fixed period. This money is then invested in various debt instruments whose maturity is around the FMP's maturity date. For example, if an FMP is for 3 years, the fund manager will invest in bonds or debentures that also have a maturity of around 3 years.
Who is an FMP best suited for?
FMPs are beneficial for investors who want a good return on their money for a fixed period, with low risk. FMPs aim to provide investors with stable and predictable returns, along with capital protection. Because they invest in debt instruments, they are less volatile than equity funds. Fund managers hold these instruments until maturity, reducing the impact of interest rate fluctuations on the fund.
Advantages of Investing in FMPs
Predictable Returns
The biggest advantage of FMPs is that they provide you with an estimate of your returns before investing. Although they are not guaranteed, they are more stable than equity funds due to their investment in debt instruments.
Lower Risk
FMPs carry significantly lower risk than equity funds. They are an excellent option for investors who wish to avoid market fluctuations.
Tax Efficient
FMPs, especially over the long term, can be quite tax-efficient. If you invest in an FMP for more than 3 years, you benefit from indexation benefits. This can significantly reduce your tax liability, as capital gains are taxed only after adjusting for inflation.
No Entry/Exit Load
Most FMPs do not have any entry or exit loads because they are closed-ended funds. This means you don't have to pay any additional fees when investing or withdrawing money.
Hedge Against Market Volatility
When the stock market is uncertain, debt funds like FMPs prove to be a haven. They provide stability to your portfolio.
Drawbacks of Investing in FMPs
Lack of Liquidity
FMPs are closed-ended, which means you cannot withdraw your money before maturity. If you need money before maturity, you may face difficulties.
Lock-in Period
Your money is locked in for a certain period. During this time, you cannot use the money for any other purpose.
Credit Risk
Although FMPs are low-risk, credit risk still exists. If the company in which the fund has invested is unable to repay, you could suffer a loss. However, fund managers typically invest in high-rated instruments to minimize this risk.
Reinvestment Risk
When an FMP matures, interest rates may be lower. In such a case, you may not receive the same returns as before.
SIP and FMP: What is the difference?
SIP is an investment method that can be used in any equity or debt mutual fund. Through a SIP, you invest small amounts at regular intervals, which benefits from compounding.
An FMP, meanwhile, is a type of mutual fund that invests in debt instruments with a fixed maturity date. FMPs typically involve lump-sum investments.
In essence, a SIP is a 'method' of investment, while an FMP is a 'product'. You can also invest in an FMP through a SIP (if the fund house offers this option), but most FMPs involve lump-sum investments.
Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
