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If you prefer safe investments, most people prefer options like FDs and RDs. When it comes to investing a lump sum, the first thought that comes to mind is fixed deposits. But the truth is, the world of investing is much broader than this. If you're one of those investors who doesn't mind taking a little risk for better returns than FDs, then a Fixed Maturity Plan (FMP) is the right scheme for you. Learn more about this scheme here.

What is an FMP?
An FMP, or Fixed Maturity Plan, is a closed-ended debt mutual fund that invests in safe options, i.e., debt instruments. Being closed-ended means that it has a fixed investment timeframe. You can only buy funds within this timeframe. After this timeframe, new entries are not permitted. Because it's a debt fund, it invests in fixed income options rather than directly in the stock market. These include instruments such as government bonds, corporate bonds, money market securities, and debentures.

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 debt instruments with a maturity equal to the FMP's maturity. This reduces the impact of interest rate fluctuations on the fund and provides more stable returns.

Who is an FMP best suited for?

FMPs are especially good for investors who:

Look for low risk

Need money for a fixed period.

Want higher returns than fixed deposits.

Want to save tax
Advantages of investing in an FMP
Predictable Returns

The biggest advantage of an FMP is that it gives you an estimate of your return before investing. While it's not guaranteed, it's more stable than equity funds due to its 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 very tax-efficient. If you invest in an FMP for more than three 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-end funds. This means you don't have to pay any additional fees when investing or withdrawing.

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

Know the disadvantages of FMPs, too.

1. Unable to withdraw funds before maturity: Due to low liquidity, sudden cash withdrawals can be challenging.

2. Lock-in period: The funds are locked up for the entire term.

3. Credit risk: If a company defaults, losses are possible. However, this risk is higher for lower-rated securities.

4. Reinvestment risk: When an FMP matures, interest rates may be lower. In such a case, you may not receive the same returns as before.

SIP and FMP: What is the difference?

SIP is an investment method that can be used in any equity or debt mutual fund. With a SIP, you invest small amounts at regular intervals, which benefits from compounding.

An FMP is a type of mutual fund that invests in debt instruments with a fixed maturity date. FMPs are typically lump-sum investments.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.