FIXED MATURITY PLAN

Before the scheme opens, the tenure is made known. You must pick a tenure most suited for you.

Note:

• FMPs are either open ended (more the exception) or close ended (more the norm).
• Open ended funds allow you to enter (buy units) and exit (sell units) any time you want.
• Close ended means they remain open for subscription only for a short period of time. They then close and do not accept any fresh deposits. They also do not allow current investors to withdraw. So your money is locked in during that time frame.
• If you need the money urgently, you can sell your units. But you will have to pay an exit load (the fee when you sell the units of a fund).
• Close ended schemes charge a load between 1% and 2% of the Net Asset Value (price of a unit of a fund) at the time of withdrawal. This is referred to as an exit load and is levied when an investor wants to sell his/her units.
• The reason for this steep load is to dissuade investors from exiting before the fund matures. Of course, if you hold on till maturity, you will not have to pay an exit load.
• Generally, there are no entry loads for such schemes. This is a fee charged when investors buy the units of a fund.
  

How do they differ from income funds?

• Dividend payout, dividend reinvestment or growth schemes?
  An income fund will invest in the same instruments like an FMP. But an open ended income fund will not have a fixed tenure. 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 a five-year maturity, for instance, will invest only in instruments that have a five-year maturity. Similarly, a one-year FMP will invest in one-year maturity investments. Because of this, he can even give an indicative return (though he cannot assure one) unlike an income fund.

How do they differ from fixed deposits?

The similarity first: both have fixed tenures.

The difference: a fixed deposit gives assured returns. You know what you are getting and when. An FMP will give an indicative, but not assured, return. You will be expected to invest a minimum of Rs 5,000 in an FMP. Not so in the case of a bank deposit, which can be less.

What is the tax impact?

• If you invest in an FMP, the dividend is tax-free in the hands of the individual investor.
• If you invest in the growth option of the FMP for less than a year, the gains are added to the investor's income and taxed at the investor's slab rate.
• If you invest in the growth option of the FMP for over a year, you pay either 10% capital gains tax without indexation or 20% with indexation.
• Indexation is the process by which the inflation is taken into account when computing the tax liability to understand indexation.

What are the returns you can expect?
The mutual fund will have to pay a dividend declaration tax of 14.5%.  After deducting that, returns in the hands of the investor can be higher than a bank deposit.

Let's assume an FMP gives a return of 5.50% for a one-year plan. Against that compare a one-year bank fixed deposit.

Should you consider FMPs?

Sure. If you do not like to take any risks with your savings and your diet consists of fixed return investments, this is one option to consider.

Or if you have some money that you would like to put away for a very short period of time, this is an option for you.

But read the investment objectives of the scheme carefully before you invest. A fund with a long-term horizon like a few years may have a provision to invest a small portion in equity.

For instance, Franklin Templeton had launched a 60-month plan where a cap of 30% of the investments could go into equity. So make sure you know what you are investing in.