Fixed Maturity Plans (FMPs) are debt funds which have a fixed maturity period and also can be subscribed to, in a certain period of time. The fund houses floating the NFPs come up with a new fund offer for a specific duration and the MFP will have an opening and closing date during which only they can be subscribed to. FMPs usually invest in debt instruments like a certificate of deposits (CDs), money market instruments, corporate bonds, commercial papers (CPs) and bank fixed deposits.
Based on the duration of the NFP, the money of the investor is allocated into a particular instrument for the duration. An FMP follows a buy and hold strategy and there is no frequent buying and selling like in the case of equity funds. Thus, Fixed Maturity Plans are mutual funds which have become alternative to the conventional fixed deposits. The value of the FMP is reflected by the fund Net Asset Value (NAV). The investor will get to know the NAV of the FMP on a daily basis. The point to be dwelled upon is that NAV of the fund fluctuates every day because it is affected by the interest rate movements in the economy. This makes FMPs riskier than FDs. Thus FMPs are ideal for those investors who need returns higher than a regular FD but may digest the frequent NAV fluctuations.
Compared to equity funds, FMPs are low risk-low return investments. Since 2014, because of a change in the tax treatment of debt funds, investors need to stay invested for at least 3 years to take the benefit of indexation on long-term capital gains tax. Hence, FMPs are ideal for those who have no liquidity requirement for at least three years.