FMP Fixed Maturity Plan Demystified

There is never a dearth of ideas among the AMC (Asset Management Company) think tanks, when it comes to drawing investors towards their offerings. The AMCs usually adopt innovative ways to promote their products. Often these ideas have the desired impact and get investors all interested.

While such promotional gimmicks have always been in vogue, they have become more visible over the years as AMCs scramble to mobilise assets. A glimpse of this can be seen in some of the recently launched FMPs (fixed maturity plans), with some AMCs projecting a relatively higher cost inflation index (CII) to make the FMPs returns more attractive.

Recently one of my client asked me about FMP’s / ELD’s he also shared with me one of the mailers which stated absolute return of 15% over three years with an entry load of 2.5%. With banks offering 9.5% pa and equities not doing so well it’s good isn’t it?

Well not quite you see the mailer “assumes” that you understand all the intricacies of financial terms. So the trick of the trade is “absolute”, with 15% absolute return means that 15/3 = 5% p.a. again please note that I have not yet considered an entry load.

So FMP’s are bad are they? No in fact fixed maturity plans are great when you understand the product. First of all decide what you need do you need an equivalent of a fixed deposit? If yes that see that the FMP’s are not linked to any equity, second study the offer document to see how secure is the FMP, one needs to understand that the money in FMP is then invested in instruments like company deposit’s and other debt instruments which have a variety of risk rating you may need a good financial planner to help you out here. Last but not the least always remember that the return is an indicative yield, if the underlying asset [e.g. a company deposit] defaults or does not pay the AMC your yield goes down.

So what’s the definition?

What is an FMP?

FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you.

The Tax Angle

FMP’s are taxed similar to a fixed deposit unlike equity based schemes which do not attract tax after one year .However they score over fixed deposit by giving the option to calculate tax using an indexation method. [More about indexation method in coming months] .

On more plus for FMP is that they give better rates even as compared to an equivalent FD’s and the penalties on premature withdrawal are less as compared to FDs.

Please remember that the above comparison is generic in nature hence you may find some product which is an exception to the norm. In case you are in a tax bracket you might also like to evaluate the dividend option. Please take help of a financial planner to evaluate a right product for you.