Fixed Maturity Plan (FMP)

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Noisy Market

Both the equity and the debt markets have been in turmoil for the last two months. Investors are finding it difficult to invest. They are not sure where to hide or safeguard themselves in this failing market. Is there any way out? Yes there is. In Mutual Funds, there is always one or couple of schemes that are available to get decent returns without much volatility. This category of funds is suitable for any type of situation and for any type of investor who wishes to reduce volatility and get almost certain returns. What we mean is, one close ended plan that is usually called Fixed Maturity Plan (FMP).

Close Ended Mutual Funds

Most of the time, investors frequently ask this question that in how many years we have to invest  and when will we get our money back? Usually in Mutual Funds, we can enter into funds at any time and get the money back on any working day (or) as and when we need the money. This type of schemes are called Open Ended Schemes. Most of the Mutual Funds come under this Open Ended category. The opposite of this category of schemes are also available in Mutual Funds and they are called Close Ended Mutual Funds. Equity based as well as Debt based Close Ended funds are available in Mutual Funds. In order to have reduced volatility and to get slightly better returns, we recommend Fixed Maturity Plan, which comes under Close Ended Debt fund category. FMP is also known as Fixed Tenure Funds /Plans (FTF/FTP).

Fixed Maturity Plans (FMP)

As we know, Debt Funds are impacted by three types of risk. First one is interest rate risk, second one is credit risk and the third one is liquidity risk. Out of these three risks, FMP’s are mostly not affected by interest rate risk and liquidity risk. The reason being, it is a fixed tenure mutual fund. Here the fund manager invests in the debt bonds, where scheme maturity and bond maturity are more or less similar, so on maturity, he will get returns as per the agreed terms. In this way interest risk rate is averted, but at the same time, as any other debt funds, these funds are also subject to credit risk. This has to be kept in mind always. In order to reduce the risk of the investments, the risk averse investors can choose FMP investing in AAA bonds, and those who wants to get slightly higher returns and stomach the risk can go in for FMP investing in AA bonds. (The fact of life is, in the recent past like ILFS, AAA bonds have also come under the defaulting category. We can keep this in mind, but should not worry too much. It is one off case and all AAA rated bonds will not default at the same time. We at least hope so)

Calculating Indicative Yields

In Fixed Maturity Plans, we can calculate likely returns at the end of the maturity period. Most of the schemes will mature only after 3 years. This is because in the recent past, the long term capital gain is applicable to debt funds only after 3 years. Returns received before 3 years is short term. For example, we can take 3 year FMP which completely invest in AAA bond and get a yield of 9%. If the expense ratio is 0.5 %, then the likely yield from the schemes is 8.5% (9 - 0.5 = 8.5). Generally, FMP will invest in mixed assets - the table given below gives an example of how to calculate yield in the case of schemes invested in more papers with the different yields.

Example for calculating indicative yield of FMP
Instrument	Allocation %	Expected yield %	Weighted yield %
AA Bond	75	9.25%	6.9375
AAA Bond	25	8.80%	2.2
Yield for the fund			9.1375
Expense ratio			0.5
Indicative final yield for investor			8.6375

Current FMP open or in the pipeline for the month of November

List of open schemes and the ones likely to open in the near future.

Fund name	Launch Date	Close Date	Tenure-Days
ICICI Prudential Fixed Maturity Plan - Series 84 - 1247 Days Plan M	2-Nov-18	5-Nov-18	1247
Aditya Birla Sun Life Fixed Term Plan - Series RN (1240 Days)	5-Nov-18	13-Nov-18	1240
Reliance Fixed Horizon Fund XXXIX - Series 15	13-Nov-18	14-Nov-18	1259
Tata Fixed Maturity Plan Series 56 Scheme E	19-Oct-18	2-Nov-18	1099
UTI FTIF Series XXX - XI	12-Nov-18	26-Nov-18	1246

Closing

• At the end of the day, the debt funds are tax efficient than bank deposits and in FMP, tax on returns are paid after indexation.
• Take Home Money is usually high in FMP after tax.
• These are good option for conservative investor to get more or less fixed return / expected return in fixed period generally volatility is very low in this funds.
• This is popular among knowledgeable investors.
• This will be good option for current market, for risk averse investor.
• This is the only fund in mutual funds, where we can arrive expected returns more or less close to reality

So those who wish to get slightly higher returns with less tax and less volatility can consider investing in Fixed Maturity Plans.


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