The fact is that according to the SEBI rules, mutual funds are not allowed to assure returns. The yield is indicated and not assured. However, for all practical purposes, the indicated yield is almost exactly what the investor gets at the time of maturity.

What is an FMP?

FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date ie 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.

FMPs do not invest in equity. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations.

Liquidity

In most open-ended mutual fund schemes, one can redeem one’s units anytime. However, the structure of the FMP does not lend itself to this kind of liquidity. One should invest the money that he is more or less sure that he is not going to need it during the tenure of the plan. If you withdraw before the scheme closes, generally a steep exit load is imposed.

The reason for this steep load is to deter investors treating the FMP like a normal income scheme. Though income schemes invest in similar instruments as an FMP, being open-ended and not having a specific tenure based investment strategy, these are subject to interest rate risk leading to fluctuations in the NAV.

Lately the interest rates on bank deposits have increased leading many investors to wonder whether a simple Bank Fixed Deposit (FD) would serve better than having to go through the process of investing in an FMP. Though Bank FDs and FMPs currently offer a similar rate of return; the tax impact tilts the scales in favour of the FMP.