It is nothing short of an outrage that an individual must ceaselessly toil until the end of his time. After a point in time, the body gives in to senility, rendering the person old and doddering. In the face of this scenario, imprudence inevitably leads to resignation to one’s fate. The cruelty of such an eventuality perhaps alarms one to act judicious and invest and insure himself against any future uncertainty. Accepted wisdom, thus, tells us that it is imperative to invest wisely. Today, there are numerous investment plans offering fairly gratifying return amounts using interests accrued over the years.
A Fixed Maturity Plan (FMP) is a close-ended fund that invests in money and debt, and has the same maturity date as that in the plan. The main focus of the fixed maturity plan is to guarantee a steady stream of income using interest payments. These payments are provided while exposing the investor to significantly lower risk levels than those incurred in other plans. These are considered to be long-term investments that reap a yield that is considered to be the annual returns.
Following are the key benefits of FMPs:
- Capital Protection: FMPs assures less risk of capital loss compared to equity funds due to investments made in debt and money market instruments.
- Tax Benefit – FMPs score over fixed deposits owing to their tax effectiveness both in short-term and long-term plans.
- Lower Cost – Since these instruments are held until maturity, there is cost saving with respect to buying and selling of instruments.
FMPs consists of various fixed income instruments with matching maturities. Based on the tenure of an FMP, a fund manager invests in instruments such that all of them mature at around the same time. During this tenure, all units of the plan are held until they mature on a specified date. Thus, investors get an indicative rate of return for the specific plan.
- Returns – FMPs are equivalent of a fixed deposit in a bank. However, while the maturity amount of a fixed deposit in a bank is guaranteed, that of an FMP is not.
- Duration of Investment – FMPs invest as per the tenure of the Scheme, i.e. ranging from one month to three years. FDs, on the other hand, have a broader investment horizon of 15 days to 10 years.
- Taxation – In FDs, the interest income is taxable at the applicable tax slab. If an investor invests in the growth option of an FMP of less than a year, gains are added to the investor’s income and taxed at the investor’s slab rate. If he/she invest in the growth option of an FMP of more than a year, he is required to pay either 10% capital gains tax without indexation or 20% with indexation.