What is a Fixed Maturity Plan (FMP)? A Simple Guide
A Fixed Maturity Plan (FMP) is a close-ended debt fund with a fixed maturity date. It invests in debt instruments that mature around the same time as the plan, aiming to reduce interest rate risk. FMPs suit investors who can lock money for a set period for relatively predictable returns.
A Fixed Maturity Plan is a debt fund with a set end date, holding bonds that mature alongside it. This design aims for more predictable returns.
This explainer keeps the language simple and the examples relatable. You can explore debt funds on Stockk.
Key Takeaways
- An FMP is a close-ended debt fund with a fixed maturity.
- It holds debt maturing around the plan's end date.
- This reduces interest rate risk.
- Returns are relatively more predictable.
- Your money is locked until maturity.
How does an FMP work?
An FMP is a close-ended debt fund that runs for a fixed period, such as three years. It invests in debt instruments that mature around the plan's end date, so the fund plans to hold them until they mature. Because the bonds are held to maturity, the fund is less affected by interim interest rate swings, making its returns relatively more predictable than an open-ended debt fund.
Let us say an FMP runs for three years and buys bonds maturing in about three years. By holding them to maturity, it aims to deliver a return close to their yield, with less interference from rate movements along the way.
FMP vs open-ended debt fund
| Feature | FMP | Open-ended debt fund |
|---|---|---|
| Structure | Close-ended | Open-ended |
| Maturity | Fixed date | None |
| Liquidity | Locked until maturity | Anytime |
| Rate risk | Reduced | Ongoing |
What to weigh
- Predictable-ish returns: from holding to maturity
- Reduced rate risk: less interim sensitivity
- Locked money: no free exit until maturity
- Credit still matters: issuers must not default
Who should invest in FMPs?
FMPs suit investors who can lock money for a fixed period and want relatively predictable debt returns with reduced interest rate risk. The trade-off is limited liquidity, since you cannot freely redeem before maturity. Credit quality of the underlying bonds still matters, as a default would affect returns. For those valuing flexibility, open-ended debt funds may fit better.
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Mutual fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not a guarantee of future returns, and this article is for learning only, not investment advice.
Frequently Asked Questions
What is a Fixed Maturity Plan?
It is a close-ended debt fund with a fixed maturity date, holding debt that matures around the same time to reduce interest rate risk.
Why do FMPs have more predictable returns?
Because they hold bonds to maturity, they are less affected by interim rate swings, making returns relatively more predictable than open-ended debt funds.
Can I withdraw from an FMP anytime?
No, FMPs are close-ended, so your money is locked until maturity, unlike open-ended debt funds that allow redemption anytime.
Do FMPs carry any risk?
Yes, credit risk remains, since a default by an issuer would affect returns, even though interest rate risk is reduced by holding to maturity.
Who should invest in FMPs?
Investors who can lock money for a set period and want relatively predictable returns with reduced rate risk. StockkAsk is there if you want to dig into the details.
Investments in securities market are subject to market risks. This article is for educational purposes only and does not constitute investment advice.
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