Fixed Maturity Plan (FMP) – An Alternative to Conventional Debt Funds
Due to the volatility of the stock market, many investors prefer to invest only during the time when the going gets smooth again. In the meantime, the funds need to be parked at a place where capital is guaranteed and return is reasonable. Simultaneously, there must be enough liquidity as the funds could be required anytime whenever there is an investment opportunity in the stock market.
FMP Mutual Funds are the appropriate solution for such a need
What is FMP?
Fixed Maturity Plan, shortly known as FMP, is close-ended income schemes with a fixed maturity period. This maturity period could range from 1 month to as long as 5 years or more. Just like a debt fund, FMPs invest in debt instruments like a Certificate of Deposits (CDs), Corporate Bonds, Money Market Instruments, Government Securities, etc.
The tenure of these instruments depends on the maturity period of the FMP.
How is FMP different?
Unlike other debt funds, the FMP follows a buy and hold strategy which means there is no frequent trading of debt securities. This helps to keep the expense ratio of FMPs at a lower level as compared to other debt funds.
FMP often invest in the instruments that mature at the same time their schemes are coming to an end. A 90-day FMP will invest in ultra short-term instruments that mature within 90 days, similarly, if an FMP is for 5 years, it may preferably invest in a corporate bond with a maturity of 5 years. This effectively reduces the interest rate risk as there is no buying and selling of the instruments.
Who can invest in Mutual Fund FMPs?
The value of your FMP is reflected by the Net Asset Value of the fund which can be checked daily. Due to the interest rate movements in the economy, the NAV of the fund may fluctuate every day, making FMPs a little riskier as compared to traditional bank FDs.
For investors who are looking to receive higher returns than a regular FD and are ready to bear frequent NAV fluctuations, FMPs are an ideal fit for them. They are low-risk low-return investments as compared to the equity mutual funds. Also, investors who are willing to park their money for the NFO tenure can invest in the FMP.