Fixed Maturity Plans or FMPs have lost their attractiveness over the years. The plans have been under pressure since being hit by defaults in 2018. In 2019, AMC Box There was a fire when Essel Group Default hit its six FMPs. Not only Kotak but big fund houses like HDFC MF, Aditya Birla Sun Life MF And Reliance MF came under scrutiny.
FMPs have given an average return of 2.96% in the last one year. The category has given returns of 4.16% and 5.24 per cent in 5 years in three years. According to data from Value Research, there are currently only three fund houses with active FMPs in the market. Recently, Aditya Birla Sun Life Mutual Fund rolled over seven of its FMPs. Kotak Mutual Fund has also decided to merge FMP Series 246 with its Corporate Bond Fund.
For the latecomers, a fixed maturity plan is a closed-ended debt fund with a fixed lock-in period and a limited investment window. Such corpus mainly consists of debt securities such as certificates of deposit, treasury bills, corporate bonds, etc.
The schemes have a fixed lock-in period for maximum returns. The lock-in of three and more years also provides the benefit of long-term capital gains. Locking in taxation and interest rates is the USP of these schemes.
“FMPs are ideal for both retail and institutional investors as they provide exposure to a diversified basket of bonds. FMPs have limited liquidity in the secondary market so investors should be sure of their cash flow requirements. Guidance to Investors One should choose the FMP on the basis of the following. “The portfolio quality provided by the AMC and it matches your risk appetite,” says Anand Nevatia, Fund Manager, Trust Mutual Fund. If the investment horizon is for 3 years or more, an FMP is an ideal tax-efficient investment option.”
FMPs generally do not carry interest rate risk and hence these products are recommended in times of interest rate fluctuations. However, there is a risk of credit default in these schemes. In case of a credit risk event, investors can get stuck in these schemes. Hence financial planners believe that target maturity plans are a better option for FMPs. This means that you can have a long term fixed debt scheme with better liquidity.
“One of the drawbacks of FMPs is the lack of liquidity. Even though these are listed on the exchange as a rule, there is no action on the exchange making them effectively operational. Unlike these, Target Maturity Funds operate in a similar manner. As FMP but have liquidity. Locking your money in FMP is not a good idea, especially at this time when interest rates are low. At most, consider buying units of FMPs issued and listed earlier With the balance amount, if there is a seller on the exchange at a discounted price, the maturity is less than the initial maturity.”