Fixed Maturity Plans

Overview of Fixed Maturity Plans

FMPs are SEBI-regulated closed ended debt funds that invest in fixed-income instruments whose maturity is aligned with the scheme’s own maturity date. The fund manager’s job in an FMP is relatively straightforward: at launch, the corpus is deployed into a portfolio of bonds that will mature on or before the scheme’s maturity date, and the instruments are held to maturity rather than being actively traded. This buy-and-hold approach eliminates mark-to-market risk from the investor’s perspective the NAV grows as interest accrues, rather than fluctuating with bond price movements.

FMPs can range from short tenure plans (3–6 months) to long-tenure plans (3–5 years or more). The tenure determines the type of instruments the FMP invests in. Short-tenure FMPs typically hold money market instruments, CDs, and CPs; longer tenure FMPs hold bonds, NCDs, and structured instruments maturing on the scheme date. The yield earned by the FMP is effectively locked in at issuance, providing indicative return clarity that open-ended funds cannot offer.

FMPs are listed on stock exchanges after their NFO closes, providing investors an exit option through the secondary market before maturity. However, secondary market liquidity for FMP units is typically thin the bid-ask spread can be wide and the prevailing market price may differ from the fund’s NAV. In practice, most FMP investors hold to maturity and redeem at the prevailing NAV on the maturity date.

Risks Involved in Fixed Maturity Plans

FMPs have a distinctive risk profile compared to open-ended debt funds.

• The buy-and-hold structure eliminates NAV mark-to-market risk from interest rate movements, but this comfort is structural rather than absolute.
• Credit risk is the primary risk in FMPs. If an issuer in the FMP portfolio defaults or is severely downgraded, the NAV declines permanently.
• Unlike open-ended funds where the manager can sell impaired bonds and manage the portfolio, an FMP holds instruments to maturity.
• Investors in FMPs with credit-impaired holdings bear the full impact of any loss on the defaulted instrument.
• Liquidity risk is a defining characteristic of FMPs.
• Investors cannot redeem before maturity through the AMC, the only exit is through the secondary market, which may be illiquid.
• Investors should therefore invest only capital they genuinely do not need before the FMP’s maturity date.
• Reinvestment risk is absent, the FMP locks in the issuance yield for the full tenure, providing return predictability.

*Mutual Funds are subject to market risks.

Factors To Consider Before Investing in Fixed Maturity Plans

When evaluating an FMP, the most important factors are the credit quality of the intended portfolio, the prevailing yield environment at launch, and the alignment of the FMP tenure with your investment horizon.

Credit quality due diligence is essential: Understand what types of instruments the FMP will invest in (the scheme information document provides indicative allocation details). FMPs that invest in AAA-rated instruments and government securities are safer; those targeting higher yields through lower-rated instruments carry more credit risk. Review the AMC’s credit research track record for FMPs.

Yield at issuance determines return: The YTM locked in at the FMP’s launch date is the primary return driver. Subscribing to an FMP when prevailing yields are high (rate cycle peak) locks in attractive returns for the full tenure. The FMP’s tenure must match your horizon committing to a 3-year FMP when you need the money in 18 months creates unnecessary liquidity risk.

List of Top Fixed Maturity Plans

The table below outlines key characteristics of fixed maturity plans to help you compare and make informed investment decisions.

How Do Fixed Maturity Plans Work?

FMPs are launched through an NFO a subscription window typically open for 3–5 business days. Investors apply during the NFO by submitting their application and funds. After the NFO closes, no fresh investments are accepted. The AMC deploys the pooled corpus into bonds whose maturities align with the FMP’s defined maturity date buy and hold from the start.

During the investment period (from NFO close to maturity), the fund’s NAV increases daily as interest accrues on the portfolio. Because the instruments are held to maturity (not actively traded), the NAV does not fluctuate with market price movements of the underlying bonds it grows smoothly at the accrual rate. This is the key attraction for investors who want to "lock in" the current yield environment.

On the maturity date, all bonds in the portfolio have matured and the principal has been returned to the fund. The AMC redeems all outstanding units at the final NAV, crediting each investor’s proportional share of the corpus (principal plus accrued interest minus expenses) directly to their registered bank account.

Before maturity, FMP units are listed on NSE and/or BSE, providing a secondary market exit route. However, secondary market volumes for FMPs are typically very low the bid-ask spread can be 1–3% and the market price may be at a discount to NAV. Investors should treat FMPs as illiquid investments held to maturity and not count on the secondary market for liquidity.

Advantages of Fixed Maturity Plans

FMPs offer a distinct value proposition: yield lock-in and return predictability.

• When launched at cycle peak yields, an FMP locks in those rates for the entire tenure, even if rates subsequently fall, the FMP continues earning the locked in yield while open ended funds see their income compress as their portfolios roll over into lower yielding instruments.
• The buy-and-hold structure eliminates NAV mark-to-market risk from the investor’s perspective.
• Unlike open ended long duration funds where NAV can decline 10–15% in a rate hiking cycle, an FMP’s NAV grows steadily at the accrual rate regardless of rate movements (assuming no credit events).
• This gives investors a level of return certainty closer to a fixed deposit than an actively managed fund.
• In a high interest rate environment, FMPs are particularly attractive for locking in current yields before rates are cut.
• Investors who subscribe to a 3-year FMP at 8–9% YTM will continue earning that rate for three years even if market rates fall to 6–7%.
• This forward-looking advantage is unique to closed ended FMPs.
• PL Capital flags live FMP NFOs with full scheme details on its platform.

How to Invest in Fixed Maturity Plans?

1. Visit plindia.com or the PL Capital app and check for currently open FMP NFOs in the debt section.
2. Review the FMP’s scheme information document: tenure, indicative portfolio instruments, credit quality guidelines, expense ratio, and AMC track record.
3. Confirm the FMP’s maturity date aligns precisely with your investment horizon FMP investments are illiquid before maturity.
4. Assess the prevailing yield environment: subscribing when rates are high locks in attractive returns for the full tenure.
5. Apply during the NFO subscription window before it closes typically 3–5 business days.
6. Submit your application and funds. Units are allotted at INR 10 face value after the NFO closes.
7. Units are listed on NSE/BSE after allotment you can track NAV on the exchange, though secondary market liquidity is typically low.
8. Hold to maturity. On the maturity date, the redemption proceeds are credited to your registered bank account automatically.

Why Should You Invest in Fixed Maturity Plans?

• Yield lock-in:
  Subscribe at peak rates and lock in the current yield for the full tenure even if rates fall subsequently, the FMP continues earning the locked-in rate.
• Return predictability:
  The buy-and-hold structure provides indicative return clarity unavailable in open-ended funds closer to the certainty of an FD than a marked-to-market debt fund.
• No mark-to-market risk:
  NAV grows smoothly at the accrual rate no interim NAV declines from interest rate movements.
• Rate cycle timing tool:
  Specifically useful for investors at or near rate cycle peaks who want to lock in high yields before the easing cycle reduces market rates.
• Wide instrument access:
  FMPs can invest in instruments and tenures that may offer higher yields than available in open-ended fund portfolios due to the closed ended structure and defined maturity.
• SEBI-regulated with full disclosure:
  Scheme information documents provide transparent portfolio guidelines before investment.

Taxation Rules of Fixed Maturity Plans

FMPs are non-equity funds. Under the Finance Act 2023, all capital gains from FMPs regardless of tenure are treated as STCG and taxed at the investor’s applicable income tax slab rate. The earlier LTCG with indexation benefit (which was particularly valuable for FMPs with tenures over three years) has been removed for investments made on or after 1 April 2023. This change significantly reduced the tax efficiency advantage that FMPs previously held over bank FDs for investors in the 20–30% tax bracket.

Dividend income is taxed at slab rates. Investors in lower tax brackets (20% and below) may still find FMPs competitive with bank FDs on a post tax basis, particularly for tenures where FMP yields exceed FD rates.

Conclusion

Fixed Maturity Plans remain a relevant fixed income instrument for investors who want to lock in prevailing yields, eliminate mark-to-market NAV risk, and have a defined investment horizon matching the FMP’s tenure. The yield lock-in advantage is most compelling at or near rate cycle peaks.

Monitor live FMP NFOs on the PL Capital platform at plindia.com and invest with the guidance of our experienced fixed income specialists.

FAQs on Fixed Maturity Plans

What are Fixed Maturity Plans (FMPs)?

Fixed Maturity Plans (FMPs) are closed ended SEBI-regulated debt mutual fund schemes with a predetermined maturity date. They raise capital only during an NFO window, invest in bonds maturing on or before the scheme date, and hold to maturity. This buy and hold approach locks in the prevailing yield at issuance, providing return predictability and eliminating NAV mark-to-market risk from interest rate movements.

How do FMPs differ from open ended debt funds?

Open-ended debt funds accept investments and redemptions continuously at current NAV. FMPs are closed you can only invest during the initial NFO and cannot redeem through the AMC before maturity (only through thin secondary markets). Open ended funds mark their portfolios to market daily, causing NAV to fluctuate. FMPs hold to maturity, so NAV grows steadily at the accrual rate without rate-driven fluctuations. FMPs offer yield lock in; open ended funds offer liquidity.

Can I exit an FMP before maturity?

FMP units are listed on NSE and BSE after the NFO closes, providing a secondary market exit option. However, secondary market liquidity for FMPs is typically very low the bid-ask spread can be 1–3% and the market price may be at a meaningful discount to NAV. In practice, most investors hold FMPs to maturity. Investors should treat FMPs as fully illiquid instruments and invest only capital they genuinely will not need until the maturity date.

When is the best time to invest in FMPs?

FMPs are most valuable when subscribed at or near the peak of an interest rate cycle. Subscribing when prevailing yields are high locks in those returns for the full tenure even if the RBI subsequently cuts rates, the FMP continues earning the locked-in YTM while open-ended funds see their portfolio yields compress. The yield advantage of FMP lock-in over open-ended funds is maximised when the gap between current peak rates and expected future rates is largest.

What credit quality do FMPs maintain?

The credit quality of an FMP portfolio varies by scheme and AMC. The scheme information document provides indicative allocation guidelines including the instrument types and minimum credit ratings that the fund will invest in. FMPs from reputed AMCs typically invest in AAA-rated and government instruments for higher credit quality schemes, or AA and A-rated bonds for higher yield mandates. Investors should review the SID carefully and assess the AMC’s credit track record for FMP portfolios before subscribing.

How are FMPs taxed?

Under the Finance Act 2023, all capital gains from FMPs are treated as STCG and taxed at the investor’s income tax slab rate, regardless of tenure. The three-year LTCG with indexation benefit which previously made long-tenure FMPs significantly more tax-efficient than bank FDs has been removed for investments post-April 2023. This has reduced the tax efficiency advantage of FMPs, though investors in lower tax brackets may still find them competitive versus bank FDs.

What is the minimum investment in an FMP?

The minimum investment in an FMP is typically INR 5,000 per application during the NFO window, though this varies by AMC and scheme. Applications must be submitted before the NFO subscription window closes typically within 3–5 business days of the NFO opening. Unlike open-ended funds, FMPs do not support SIP investments or top-up subscriptions after the NFO closes. All applications are processed at INR 10 per unit face value at allotment.