17 Sep 2014

Mutual Funds Part 7/7 - Fixed Maturity Plan

What is a Fixed Maturity Plan? (FMP)
It is a fund where money is locked in for a period of time. Exiting it is next to impossible. It has given "fixed deposit like" returns in the past.

Why do people invest in FMPs?
People invest because it has the potential of giving good returns. Earlier FMPs had a tax advantage if you invested for more than a year. They returns were taxed at 10% without indexation or 20% with indexation if you stayed for more than a year.
Budget 2014 has changed the taxation policy and now the LTCG applies only if you stay put for three years.

FMPs are NOT fixed deposits. They are "fixed" in terms of the tenure but the returns are not guaranteed and the principal is not safe. It is considered a pretty safe product but there are not guarantees.

Are FMPs still worth it?
If you can stay locked in for three years, FMPs might still be worth it. If you want liquidity and close to FD returns, choose a debt fund.

I am wrapping up the mutual fund series with this article.

1 comment:

  1. It is anther investment option. It is likely to suit people not seeking liquidity and able to put funds away for a 3 year period. The risk is with respect to returns that are not guaranteed and the possibility of principal being diminished. Therefore, calls for a careful consideration in choosing the fund. The attraction could be it can give relief to people in higher tax brackets.