Fixed maturity plans – FMP


Through FMPs, Mutual funds achieve a fine balance among investment objectives—security, growth and liquidity.

The smile is back on the face of devotees of fixed deposits after so many months or one could say, after a few years. Most commercial banks’ decision to offer 8% interest for one-year (even lower tenure) deposit is the reason why many of these safety conscious investors, especially retired people are smiling.

It is actually a good thing for the retired. Interest rates have been downhill for the last two-three years. And with the stock market doing very well, retired persons were feeling completely left out. Rising prices were also a concern.

The good times are back for the pensioners. However, one (retirees) doesn’t want to lock-in all the money in bank fixed deposits. They want to know what other safe investment options are there. The reason is not to put all eggs in one basket.
Already, mutual fund investments are showing a downtrend. A retired person at least would like to protect his capital and at the same time earn decent returns. Lower returns are comforting if the investment is safe because a pensioner with no other income doesn’t want to take unnecessary risks.

When someone is not paying any tax, one should try to find the highest rate one can get. The next thing is to assess the risk and liquidity. On the risk front, bank fixed deposit and mutual funds score the same. But on liquidity, mutual funds score over fixed deposits says a CIO of a multinational bank. This is because in a fixed deposit you have to lock-in your money for a fixed period. If you break it before the period, you may lose some part of the interest. You don’t have this problem in debt schemes. For those who pay taxes, debt funds are much superior to bank deposits due to the tax breaks.

Fixed maturity Plans

So, after applying this principle, where can an investor park his money within the mutual fund space? Fixed maturity plans from mutual funds are an attractive option available to investors at this point of time. Fund houses are queuing up to launch Fixed maturity Plans or FMPs. In fact, fund houses have mopped up over Rs. 28,571 crore as on July’06 via launching FMPs.

FMPs are essentially close-ended mutual fund schemes with a fixed maturity. They come with disparate maturities like three month, six month, and one year among others like a fixed deposit. As with term deposit, investors can exit these schemes after paying a small penalty. The fund will specify the benchmark against which the performance of the scheme is measured.

Since it is a close-ended scheme, the fund manager will ensure that the maturity of the portfolio matches the maturity of the scheme. This will ensure that the scheme will not be affected by interest rate volatility. This also helps investors to find out the likely returns on maturity by deducting the expenses from the current benchmark returns. FMPs are ideal for people looking to park money for a fixed term in a mutual fund scheme, but don’t want to be worried about fluctuations in NAV (net asset value) or interest rates, says a financial advisor.

Short-term plans

Those who don’t want to lock in their funds can look at short-term funds. People have been shifting from income funds and floating rate funds to short-term schemes because of the rise in interest rate.

When interest rates rise, the NAV of the scheme tend to fall because of the inverse relationship between the price and yield of bonds. Short-term schemes may earn a little less, but they offer superior liquidity. In fact, short-term funds have offered above 6% in the last one year. So don’t let your money earn 3.5% in a savings deposit.

Company Deposits

However, investment experts have a word of caution when it comes to investing in conventional avenues like company deposits.

Not many good companies are taking deposits anymore. Some of them may just renew already existing deposits. Those who are coming to the market are with lower rating and it is better to earn less than taking the risk with the new low rated companies.

Comments are closed.