Fixed Maturity Debt Fund
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5Y
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1Y
3Y
5Y
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1Y
3Y
5Y
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1Y
3Y
5Y
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1Y
3Y
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A Fixed Maturity Plan (FMP) or Fixed Maturity Debt Fund is a closed-ended debt mutual fund that invests in fixed-income instruments like bonds, government securities, and money market instruments with a maturity date aligned with the fund's tenure. These funds are launched for a specific duration, such as 1 year, 3 years, or 5 years, and investors can only invest during the New Fund Offer (NFO) period.
Seeds of the FMP go beyond just the corpus as they are also conducted from the proceeds and are then invested till the maturity date allowed after which the investor is given the corpus with the gains. FMPs are, by their very nature, debt funds that hold the debt instruments they have invested in until the maturity date, hence they become minimally exposed to interest rate risk and NAV volatility and thus aims at providing the most predictable and steady returns. Liquidity and implications of taxation should be taken into account before investing in fixed maturity funds.
Who Should Consider This Fund
Fixed Maturity Debt Funds are meant for investors who have a definite period during which they want to invest and are quite comfortable with the idea of locking in their money for a given time period. These funds work best for:
- Investors looking for predictability in returns.
- Those in higher tax brackets, as FMPs offer tax-efficient alternatives to fixed deposits when held for over 3 years.
- Investors who do not need liquidity during the tenure of the fund.
- People with planned financial goals, such as education expenses, travel, or home renovations, typically scheduled after 1–3 years.
The FMPs from a stock perspective would be a good option, being able to lock yourself into that rate for the full period and rates are high at present.
Risks and Return Potential
The FMPs attempt to limit interest rate risk that happens as fund managers generally keep bonds until the end of the period, which means the results will not be influenced by the price. But they are also prone to credit risk if the paper in the portfolio is from less creditworthy issuers.
Returns from Fixed Maturity Debt Funds typically range between 6.25% and 7.5% per annum, depending on the interest rate environment and the credit quality of securities held. These returns are not guaranteed, but the fund's structure makes them highly predictable if the portfolio consists of high-quality assets.
Taxation benefits are a key attraction. If held for over 3 years, gains are taxed as long-term capital gains at 20% with indexation, making the post-tax returns quite competitive.
Benefits of Fixed Maturity Debt Funds
- Predictable returns: Reduced impact of interest rate movements.
- Tax-efficient: Particularly when held for more than 3 years.
- Lower volatility: Minimal NAV fluctuation if held till maturity.
- Ideal for planned goals: Maturity can be aligned with financial timelines.
Things to Keep in Mind Before Investing
- No early exit - Funds are locked in till maturity (though exchange listings exist, liquidity is limited).
- Always check the credit quality of the portfolio.
- Returns are not guaranteed, even though they are highly predictable.
- Best used when you have clarity on your investment horizon.
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