Financial Markets are abuzz nowadays with new FMPs (Fixed Maturity Plans) being flooded by Mutual Fund companies. These would be in addition to the numerous FMPs which already exist. Let us take a look at FMP as an Investment Option.
FMP’s were used as a Tax saving and higher return-generating investment option by investors who wanted to park their money instead of fixed deposit schemes. Due to their tax effectiveness they became a popular choice for investors in the recent past. FMP’s are basically close ended mutual fund schemes which are Debt oriented and have a fixed maturity period. The maturity varies from 30 days to 3 years.
The investment of these FMPs is mostly into Short Term debt securities like Commercial Paper, Certificate of Deposits and Treasury bills which assured steady returns. The main benefit of FMP’s was their tax efficiency as the investor could take the benefit of Indexation for a FMP of more than three years.
If we look at the current market scenario, a lot of new FMP schemes are launched on a regular basis which are being offered by Financial Advisors and Bankers. But it is very important for an investor to identify the need for such products as they also come with certain constraints
schemes have a fixed tenure which hamper the liquidity of these instruments. The investor may need to withdraw certain amount during the tenure or want to exit the plan which would not be possible in FMP’s.
The returns in these schemes are not assured and since their investments are based on fixed income instruments, they cannot be a part of long term investment strategy. Although for a short term investment requirement, they may be a suitable option to invest which has been reflected by the past performance of a 1-2 year FMPs. Their returns have been better than fixed deposit schemes.
These schemes may not be suitable for everyone as each investor has their own investment requirement. For example an FMP cannot be offered to someone who is looking for long term investment strategy to meet financial goals like retirement, education of their child or marriage, etc. because it reduces the potential of better returns.
Interest Rate Risk:
During inflationary situation, where the rate of interest is increased to control the inflation rate, holding these FMP’s would be very risky. Investor would not have any exit option owing to which it would have negative impact on overall returns.
Although FMPs offer stable returns in a short to medium term tenure, they do not serve the investment requirement of all the investors. One should buy a product as part of a larger portfolio strategy, not based on individual products pushed by banks and agents. Most of the mistakes in Personal Finance happen when we buy products from our trusted bankers and agents without thinking of an overall strategy and why that product is needed. FMPs are typically pushed by advisors to make a quick buck.