Fixed Maturity Plans (FMPs) invest in fixed income instruments, like bonds, government securities and short-term fixed return investments to name a few. So they are among less risky investment options, considering highs and lows of share market and interest rates. You will be expected to invest a minimum of Rs 5,000 in an FMP.

As compared to fixed deposits (FD), returns from the fixed maturity plans have been better. While FMP has given 8% return in the past one year, returns from FD have been 7.25-7.50%. You also get the benefit of indexation in FMP. At present, FMP is hugely popular among institutional investors. But now it is reaching out to small investors.

Mutual funds have a new way of taking FMPs to small investors. Earlier, they have been investing in only government bonds. But now they have added equity to their investment portfolio.

In the past six months, funds houses like Standard Chartered, Kotak and Principal have launched fixed maturity plans in which 65-80% is debt and 20-35% equity. Generally, FMPs tenure is one to two years. Not just safe investment they also promise dual benefits. People have gone for FMPs in the past six months. Closed ended funds with an investment period of three or 13 months have collected Rs 30,000 crore in the past six months.

Mutual funds can hope to attract small investors into investing in FMP considering increasing interest rates and volatility in stock market. After a sharp fall in the share market, people have started looking for a safe investment option having good returns. And FMP could be a good option for them. Our expert Nand Kumar Surati, Chief Investment Officer, Lotus India AMC, gives details about the suitable investment plans.

Q. How is fixed maturity plan different from liquid fund or monthly income plan?

FMPs have a fixed maturity date. It could be 30 or even 365 days. Some even have a three or five-year time frame. At the end of this period, the scheme matures, just a like a fixed deposit.

Because the tenure of the scheme is fixed, it makes investing easier for the fund manager. He can invest in instruments that will mature around the same time the scheme matures, in one go. So, a fund manager with an FMP of one-year maturity, for instance, will invest only in instruments that have a one-year maturity.

They are less exposed to interest rate risk compared to other income schemes since instruments therein are typically held till maturity and hence yield a fixed rate of return which is equal to the yield at which investments were made. This effectively reduces what is called price risk (the potential for making a loss on bonds due to pressure to sell them off in the market).

If we compare it with liquid funds, it has papers of different maturity periods. The average maturity period of liquid funds is around 200 days.

Q. Between Monthly Investment Plans (MIP) and fixed maturity plans which gives you higher returns?

SC Goyal, 61, retired engineer, Hardwar

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