FMP: Fixed maturity Plans: Introduction, Example, Calculations

There are loads of FMP plans or Fixed Maturity Plans available in the market. Some investors understand it and depending upon their risk appetite, they invest in these FMP. While other investors who are “equity lovers” or “risk-takers”, just don’t want to care about the FMP or any other fixed income instruments.

In this article, I will aim to present an introduction to FMP, an example of FMP and how FMP works.

I hope everyone is aware of Mutual Funds. FMP’s or Fixed Maturity Plans are another set of financial products which are offered by Mutual Funds. The major difference between Mutual Fund and FMP is that the former is more into equities or shares, while the latter’s investments is primarily into debt based fixed income instruments.
Duration wise: FMPs have a fixed maturity date. Like 15 days, 30, 90, 141, 180 or even 365 days. Some even have a three or five-year time frame. At the end of this period, the scheme matures, just a like a fixed deposit in the bank. On the other hand, a mutual does not have any fixed tenure.

Where do the FMP primarily invests?
FMPs invest in fixed income instruments, like bonds, government securities, money market instruments (very short-term fixed return investments). Basically, anything that guarantees a fixed interest rate at a fixed duration.

What are the types of FMP plans available?
Open Ended FMP: Where one can sell the FMP unit before the maturity – like a mutual fund unit
Closed Ended FMP: Where one cannot sell the FMP unit till maturity – investor has to wait till the entire tenure of FMP is over. Though in case of urgent requirements, the close ended FMP units can be encashed before the maturity, but it comes at a cost of exit load which can be 1%, 2% or higher.

Generally, there is no entry load for a FMP or Fixed Maturity plan.

Are the returns in FMP 100% guaranteed?
No. Unlike bank fixed deposits, the FMP returns are not guaranteed. The reason is that since FMP invests in bonds and other debt based instruments, the price of these underlying financial instruments decide the FMP unit value. However, FMP does give an indicative return.

How about the tax impact in FMP?
If you invest in an FMP, the dividend is tax-free in the hands of the individual investor.
If you invest in the growth option of the FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate.
If you invest in the growth option of the FMP for over a year, you pay either capital gains tax without indexation or with indexation.

How to calculate profits in FMP?
This is a bit maths intensive.
Compare it to a Bank Fixed Deposit:
Invested amount – 100.00
Bank FD Return – 6%
Investment Horizon – 1 year
Your earned interest – 6.00
Tax on Interest earned (30%) – 1.8
Net interest earned after taxes – 4.2 or 4.2%

In case of FMP,
Invested amount – 100.00
FMP indicative Return – 6%
Investment Horizon – 1 year
Dividend declaration tax – 14.5%
Net tax – 5.13%
Net interest earned after taxes – 5.13%
Hence, when considering a tax bracket of 30%, the FMP performs better than the Bank Fix deposit, simply because the Mutual fund company pays the tax at the rate of 14.5% instead of you paying it at 30%. In this case, the interest received by you, post dividen declaration tax is tax-free.

One should take care of the scheme before putting in the money. A FMP fund with a long-term horizon like a few years may have a provision to invest a small portion in equity.

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