Fixed Maturity Plans: The best bet

The stock market goes up and down and there are many investors who prefer to wait out till the storm ends and then re- enter again when everything is smooth. Meanwhile, there is need for a temporary parking place for funds where capital is guaranteed and the return is reasonable.

At the same time, there should be ample liquidity, as the money could be needed anytime when there is a buying opportunity. FMPs offered by mutual funds are the apt solution for such a need.

FMPs or Fixed Maturity Plan are essentially close-ended income schemes with a fixed maturity date i.e. that runs for a fixed period of time. This period could range from fifteen days to as long as two years or more.

For instance, in a fixed deposit, when the period comes to an end, the scheme matures, and your money is paid back to you.

Just like an income scheme, FMPs invest in fixed income instruments i.e. bonds, government securities, money market instruments etc. The tenure of these instruments depends on the tenure of the scheme.

There is a need for FMPs because the traditional income funds carry a risk known as "interest rate risk". Interest rates and prices of fixed income instruments share an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa.

FMPs effectively eliminate this interest rate risk. This is done by employing a specific investment strategy. FMPs invest in instruments that mature at the same time their schemes come to an end. So a 90-day FMP will invest in instruments that mature within 90 days. Holding the underlying instruments up to their maturity effectively eliminates the interest rate risk as there is no buying and selling of the instrument needed.

Most MF schemes return your money within 5 days. However, the structure of a FMP does not lend itself to this kind of liquidity. Invest money you are more or less sure you will not need during the tenure of the plan. You can only withdraw the money during pre-set time periods. It is not an open-ended fund that allows you to exit (sell your units) whenever you want.

Further, as the scheme opens for subscription, the tenure is declared. So investments may be made for a suitable tenure. If money is urgently needed, most FMPs will charge you a steep exit load. Do check the load structure before investing. The reason for this steep load is to deter investors treating the FMP like a normal income scheme