Asset management companies (AMCs) have launched more than 50 fixed maturity plans (FMPs) in the last one year. Several fund houses are now planning to launch more of them in 2023. So, what’s the reason behind this sudden uptick and are they worth a hit for retail investors? CNBC-TV18.com spoke to few experts to get an answer to this.
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On the rise in number of FMPs, experts say that AMCs are simply trying to leverage the rate scenario and give investors an option to lock their investments for more than three years.
The advantage of FMPs beyond 36 months (three years) are the tax benefits vis-à-vis fixed deposits.
“The primary reason for FMPs is to invest in shorter maturities for a fixed period of time with fixed returns to minimise the impact of movement on interest rates, and that’s why in this rising interest rate scenario, shorter-term FMPs are gaining some kind of interest,” Prakhar Pandey, Founder and CEO at Moolaah told CNBC-TV18.com.
Here's a look at returns of some of the FMPs:
| Fund name | YTM | 1-week | 1-month | 3-month | 6-month | YTD |
| HDFC FMP 2638D February 2023 (47) - Direct Plan - GrowthFixed Maturity Plans - Debt | NA | 0.75% | - | - | - | - |
| HDFC FMP 2638D February 2023 (47) - Direct Plan - GrowthFixed Maturity Plans - Debt | NA | 0.75% | - | - | - | - |
| UTI Fixed Term Income Fund - Series XXXVI - Plan I - (1574 Days) - Direct Plan - GrowthFixed Maturity Plans - Debt | NA | 0.67% | - | - | - | - |
| UTI Fixed Term Income Fund - Series XXXVI - Plan I - (1574 Days) - Direct Plan - GrowthFixed Maturity Plans - Debt | NA | 0.67% | - | - | - | - |
| HDFC FMP 1876D March 2022 (46) - Direct Plan - GrowthFixed Maturity Plans - Debt | 0 | 0.53% | 0.69% | 1.26% | 2.62% | 1.32% |
| Aditya Birla Sun Life Fixed Term Plan - Series TQ (1879) - Direct Plan - GrowthFixed Maturity Plans - Debt | 0 | 0.53% | 0.65% | 1.18% | 2.56% | 1.24% |
| Nippon India Fixed Horizon Fund XLIV - Series 1 - Direct Plan - GrowthFixed Maturity Plans - Debt | 0 | 0.48% | 0.55% | 1.06% | - | 1.14% |
| HDFC FMP 1861D Macrh 2022 (46) - Direct Plan - GrowthFixed Maturity Plans - Debt | NA | 0.48% | 0.57% | 1.16% | 2.45% | 1.23% |
(Source: Moneycontrol)
Investment strategy
FMPs, as we know, are the fixed deposit version of the mutual fund industry, which are close-ended in nature. It is best suitable for low-risk investors who can spare the money for a period of 3-4 years (depending on the tenor of the FMP) and do not wish to take the risk of volatile interest rates in the near term.
Additionally, experts say low-risk investors looking to lock in yields at the current market rates should look at investing in FMPs.
"FMPs allow investors to lock in yields in a tax efficient way (if the FMP is greater than three years). Currently, bond yields are attractive and hence, investors can use FMPs to lock in these attractive levels of bond yield," said Alekh Yadav, Head of Investment Products at Sanctum Wealth, while talking to CNBC-TV18.com.
Many FMPs are getting launched currently and when they mature beyond April 2026 (more than three years from now) investors will get benefit of four years of indexation.
Comparison with other funds
Comparing them to liquid funds or short duration funds, Pandey said the impact of rise in yields across government/PSU and private corporate debt securities are not impacted since the yields are locked in FMPs.
"The last few months have already seen Rs 10,000 crore + put into FMPs of various AMCs," he said.
It also makes sense to compare them to target maturity funds (TMFs) as both are similar in most characteristics, except that TMFs are open-ended. However, since the TMFs are open-ended they could see redemption pressure if many investors decide to exit at the same time.
"The fund manager in that case would have to sell underlying bonds to facilitate the redemption request. If the liquidity for the bonds at the time of selling is low it could impact fund performance. Since FMPs are close-ended they would not face redemption pressures and are shielded from that impact," Yadav told CNBC-TV18.com.
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Drawback of FMP
Historically FMPs can be seen having one issue.
Some FMPs had high levels of concentration as they were not able to raise the required amount of asset under management (AUM) and thus could invest only in limited number of bonds.
"Investors need to avoid against such risk," Yadav warned.
The bottomline
FMPs of greater than three years with underlying portfolio of SDLs or government bonds can be a decent investment opportunities in current times.
However, parking 100 percent of the surplus money in one investment avenue is not advisable and so is the case with FMPs.
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(Edited by : Shoma Bhattacharjee)
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