On a recently organized workshop – a very senior investor got quite frustrated and stated is there no such product for the really conservative investors like him who had already amassed wealth by now and does not want to take any further risk? He was not interested to understand the route to equity world. Why is it that we at all times advocate about equity investments? Is there no such product in the financial market which is for the really conservative, risk averse investors?
Today write up is just a small attempt to address his query – Will try to explore such a product and it’s called the Fixed Maturity plan. They are quite popular among investors who consider them as better alternatives to the traditional bank fixed deposits. They have the potential to offer superior returns than the latter and are far more tax-efficient.
To make it more simple FMPs are basically a fund or should I say a close ended fund with a definite term and yes your money gets locked for a defined period. There are new funds launched usually with a definite time period ranging from 3 to 3.5 years (1100+ days and so on). So fund managers usually give you a slightly more predictable return. Fund managers usually buy bonds with a similar maturity and yield on those bond are certainly predictable. They are usually insulated from the interest rate risk. One would ask me why is to so? It’s simple since the investors’ money is raised for a definite time period so the money in such funds gets locked in. Money is invested into Bonds with similar maturity period and therefore there is a predictable return from such funds.
FMPs are usually meant for risk averse investors or those Bank fixed deposit investors. The advantages of FMPs are that they usually provide slightly higher predictable returns unlike the open ended mutual funds. Secondly, and most importantly they are much more tax efficient if compared to the usual Bank Fixed deposits since the money can be redeemed usually after 3 years period, so on is able to take indexation benefit. Even though mutual funds do not guarantee a fixed as they are subject to market risk still the returns are quite indicative in such funds.
The only disadvantage one can see is : – it’s very low on liquidity so in case one needs money in between you cannot withdraw the money!! While in Bank fixed deposit you can withdraw anytime by paying some penalty charges.
So in a nutshell – they are interesting option for risk averse conservative investors who do not want to take interest rate risk and can help them earn a bit better return than the Bank fixed deposits with far more tax efficiency. Last but not the least before buying an FMP from a fund house just look at the older FMPs track record.
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