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If you want to invest in mutual funds with low risk, a Fixed Maturity Plan (FMP) can be a good option. It offers the opportunity to invest for a fixed period of time and provides a fixed return. However, there are some risks involved that are important to understand.

When we think of investing today, the first things that come to mind are SIP (Systematic Investment Plan) and Equity Mutual Funds. These are investment methods that have generated significant profits for many. However, the world of investing isn't limited to equities. Many people also want good returns over a fixed period of time with low risk.

Another excellent option for these investors is called FMP or Fixed Maturity Plan. You may not have heard much about it, but it can become an important part of your investment portfolio, especially during market volatility. Let's learn about FMPs today, what they are, how they work, and how they can be beneficial for you.

What is an FMP (Fixed Maturity Plan)?

An FMP is a type of closed-ended debt mutual fund that invests in debt instruments. "Close-ended" means that you can invest in it only within a fixed time frame. Once that period ends, you cannot make new investments. Meanwhile, "debt mutual fund" means that this fund invests its money in fixed-income instruments, rather than investing directly in equities in the stock market. This includes options like government bonds, corporate bonds, money market instruments, and debentures.

Another distinctive feature of an FMP is that it has a fixed maturity date. This maturity date can range from a few months to a few years, such as 6 months, 1 year, 3 years, or 5 years. The fund house announces in advance when the fund will start and end. As soon as the maturity date arrives, investors receive their investment and the returns earned on it.

How does an FMP work?

When a fund house launches an FMP, it collects funds for a fixed period. This money is then invested in various debt instruments whose maturity is around the FMP's maturity date. For example, if an FMP is for 3 years, the fund manager will invest in bonds or debentures that also have a maturity of around 3 years.

Who is an FMP best suited for?

FMPs are beneficial for investors who want a good return on their money for a fixed period, with low risk. FMPs aim to provide investors with stable and predictable returns, along with capital protection. Because they invest in debt instruments, they are less volatile than equity funds. Fund managers hold these instruments until maturity, reducing the impact of interest rate fluctuations on the fund.

Advantages of Investing in an FMP

Predictable Returns

The biggest advantage of FMPs is that they provide you with an estimate of your returns before investing. Although they are not guaranteed, they are more stable than equity funds due to their investment in debt instruments.

Lower Risk

FMPs carry significantly lower risk than equity funds. They are an excellent option for investors who want to avoid market fluctuations.

Tax Efficient

FMPs, especially for long-term investments, can be quite tax-efficient. If you invest in an FMP for more than 3 years, you benefit from indexation benefits. This can significantly reduce your tax liability, as capital gains are taxed only after adjusting for inflation.

No Entry/Exit Load

Most FMPs do not have any entry or exit loads because they are closed-ended funds. This means you don't have to pay any additional fees when investing or withdrawing money.

Hedge Against Market Volatility

When the stock market is uncertain, debt funds like FMPs prove to be a safe haven. They provide stability to your portfolio.

Drawbacks of Investing in FMPs

Lack of Liquidity

FMPs are closed-ended, which means you cannot withdraw your money before maturity. If you need money before maturity, you may face difficulties.

Lock-in Period

Your money is locked in for a certain period. During this time, you cannot use the money for any other purpose.

Credit Risk

Although FMPs are low-risk, credit risk still exists. If the company in which the fund has invested is unable to repay, you could suffer a loss. However, fund managers typically invest in high-rated instruments to minimize this risk.

Reinvestment Risk

When the FMP matures, interest rates may be lower. In such a situation, you may not be able to get the same returns as before.

SIP and FMP: What's the Difference?

A SIP is an investment method that can be in any equity or debt mutual fund. Through a SIP, you invest small amounts at regular intervals, reaping the benefits of compounding.

An FMP, meanwhile, is a type of mutual fund that invests in debt instruments with a fixed maturity date. An FMP typically involves a lump sum investment.

In essence, a SIP is a 'method' of investment, while an FMP is a 'product'. You can also invest in an FMP through a SIP (if the fund house offers this option), but most FMPs involve lump sum investments.

FAQs (Frequently Asked Questions)

Q1: Can you do an SIP in an FMP?

A1: Most FMPs involve lump sum investments because they are closed-ended. Although some fund houses may offer SIP options within FMPs, this is not very common.

Q2: How safe are FMPs?

A2: FMPs are much safer than equity funds because they invest in debt instruments. However, they do carry some credit risk and interest rate risk.

Q3: What is the difference between FMPs and FDs (Fixed Deposits)?

A3: FDs are offered by banks and guarantee you a fixed return. FMPs are mutual funds that invest in the debt market. FMPs can be more tax-efficient than FDs due to indexation benefits for periods longer than 3 years.

Q4: When can you withdraw money from an FMP?

A4: FMPs are closed-ended funds. You cannot withdraw money before maturity. Some FMPs may be listed on stock exchanges, where you can sell them, but their liquidity is generally low.

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