Fixed Maturity Plans (FMPs) are close-ended debt funds with a fixed maturity somewhat like fixed deposits. But FMPs are different from fixed deposits because they invest in marketable debt securities like certificate of deposits (CDs), commercial papers (CPs), other money market instruments, corporate bonds, non-convertible debentures (NCDs) of reputed companies, or in government securities, maturing in line with the tenure of the scheme. Moreover, unlike fixed deposits, FMPs don’t have a guaranteed rate of return.
Being close-ended with securities maturing in line with the tenure of the fund, FMPs carry less liquidity and interest rate risk as compared to open-ended debt funds. FMPs are a suitable option if you are looking to lock your money for some time over the fixed period. FMPs offer tax-efficient returns through indexation as compared to fixed deposits because the return from FMPs are adjusted for inflation and then taxed. Since debt funds enjoy a 20% long-term capital gains tax after 3 years along with indexation benefits, three-year FMPs are cost effective compared to FDs of same tenure.
If you want to put aside some money for goals like vacation, child’s college admission, or down payment for a home loan that you foresee in the next three to five years, you can invest the money in a FMP with a maturity close to the time horizon of your goal. If you don’t have a goal and are afraid that you may spend away your savings unnecessarily, you can still invest in FMPs to lock your savings for a while since FMPs have maturities ranging from one month to five years.