The State Bank of India Mutual Fund (SBI MF) has launched its Fixed Maturity Plan (FMP) Series 68. The tenure has been fixed at 1,302 days, i.e. the scheme will mature in April 2026. The issue will end on September 21, 2022.
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An FMP, as we know, is the fixed deposit version of the mutual fund industry, and are close-ended in nature. It invests funds in various fixed interest-bearing securities maturing in line with the maturity of the scheme.
Generally, FMPs generate returns that are equivalent to the yield of securities with similar maturities prevailing on the date of the investment.
Who should invest in FMPs?
FMPs are ideal for investors who are keen to stay invested for the tenure of the scheme and are seeking an alternate investment option which aims to provide better post-tax returns with minimal interest rate risk, according to SBI Mutual Fund.
In other words, it is best suitable for low-risk investors who can spare the money for a period of 3-4 years (depending on the tenure of the FMP) and do not wish to take the risk of volatile interest rates in the near term.
What are the benefits of investing in FMP?
Minimal interest rate risk
FMPs are least exposed to interest rate risk because the fund manager will normally hold the instruments till their maturity. Also, FMPs generally invest in securities with higher credit quality so that credit and liquidity risks are minimised, according to SBI MF.
Low cost
As the investments are made in line with the maturity of the fund, there is no buying or selling of securities in the scheme. This reduces the costs of the scheme.
Taxation benefit
FMPs enjoys benefit of indexation if the maturity period is over three years while calculating tax out of return earned.
What are the associated risks?
If the profile of the scheme portfolio is poor, there is a chance of default in some securities. This could potentially hamper returns. They are also exposed to 'reinvestment risk' — that is, the risk that the fund manager faces to reinvest maturity proceeds at lower than earlier rate.
That being said, one should not blindly invest in any scheme based on any indicative yield, say experts.
(Edited by : Shoma Bhattacharjee)
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