Income Tax

How to evaluate fixed maturity plans?

How to evaluate fixed maturity plans?Fixed maturity plans are often considered as alternatives to banks but they are not so popular with investors due to lack of clarity on the returns that they are likely to generate.

Fixed maturity plans:

Fixed maturity plans, popularly known as FMPs, are similar to fixed deposits in banks, having slight difference. The amount which one gets upon maturity of a fixed deposit in a bank is ‘fixed’ or ‘guaranteed’. But on the other hand, it is ‘indicated’ in the fixed maturity plan of a mutual fund. The mutual fund companies are not allowed to guarantee returns; as such the returns are ‘indicated’ in the FMPs.

Nature of fixed maturity plans:

FMPs basically act as debt schemes where the principal is invested in fixed income securities. The term of investment can be different ranging from one month to three years.

They are closed-ended which means when the new fund offer closes, the scheme does not allow any more investment. These offers are usually open for 2 to 3 days. They are marketed to corporate bodies as well as individuals.

Fate of money invested in FMPs:

FMPs generally invest in money market instruments as well as in corporate bonds. Sometimes they are invested even in fixed deposits in banks. Depending upon the tenure of the FMP, the amount is invested.  

Minimum amount of investment:

The minimum investment is usually Rs 5,000/- for which a retail investor can easily invest.

Sale of FMPs before maturity:

An investor is not allowed to sell the fund units before maturity. But he can sell them to other persons upon exchanges.

How to calculate indicative yield?

The offer documents of FMP’s should state the instruments in which the plans are to invest and its proportions along with the yields.
Generally the fund manager retains 5% of the principal as cash and invests the rest of it in commercial papers which offers about 11.45%. The annual return of a FMP is likely to be 10.88%.
The fund houses usually charge a fee for its expenses. The maximum charge allowed for a year is 2.25% of the average asset value of the fund. But normally they do not charge so much. One can easily check the fee which is charged on existing FMPs of different houses. The average expense ratio of existing FMPs can be used to determine the expenses, which is currently about 0.5%.
The yields on most FMPs along with their ratings are provided in the business dailies. They are required to be adjusted with the expenses of the fund.

To learn about the accurate yield, one can ask the distributors or agents associated with them.  Most investors can estimate the returns exactly.

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