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Fixed maturity plan or short-term bond fund — what should fixed income investor choose?

Fixed maturity plans are schemes launched by mutual funds that come with a clearly defined tenure

July 30, 2018 / 10:02 AM IST

Lower-than-expected hikes in interest rates on bank fixed deposits and the lukewarm returns offered by bond funds make fixed income investors hunt for other options. Fixed maturity plans (FMP) lined up by mutual fund houses such as ICICI Prudential, Aditya Birla Sun Life, DSP Blackrockand Reliance make investors wonder if they should bite the bullet. In search of earning more returns than that offered on fixed deposits, where should the investors go - short-term bond funds or the fixed maturity plans?

“Interest rates in Indian economy are moving up. Prevailing yields offer a good entry point for investors in short-term bond funds. If you are not keen to take the interest rate risk at all, FMP can be tapped instead of bank fixed deposits to lock in current yields,” says Joydeep Sen, founder of wiseinvestor.in

What do fixed maturity plans offer?

Fixed maturity plans are schemes launched by mutual funds that come with a clearly defined tenure, say three years. The idea behind the theme is to invest in bonds that mature in line with the maturity of the scheme and return the money along with gains to the investors upon maturity of the scheme. These schemes invest in bonds, while some prefer to stick to AAA-rated bonds, the riskier versions go for AA-rated securities as they are keen on extra returns.