Should you invest in Fixed Maturity Plans?

When it comes to close-ended funds, many financial planners and investment advisers ask investors to skip these funds as they come with a lock-in period. But if we look at recent launches made by the AMCs (Asset Management Companies) then most of them are FMPs (Fixed Maturity Plans). This usually happens when 10-year government securities yields shoot up. So currently many FMPs are floating in the market so should you consider investing in them?
 
First, let’s understand what are these FMPs. Fixed Maturity Plan is a close-ended mutual fund primarily categorized under debt category that invests in debt and money market securities or instruments such as treasury bills, commercial papers, corporate deposits, government bonds and corporate bonds. You can invest in them only through NFOs (New Fund Offers), unlike open-ended MFs which are open for subscription at any time and also you can hold FMPs until maturity or can be sold in the secondary market before maturity.
 
Now you would ask what about returns? So if we look at the average 1-month, 3-month, 1-year and 3-year returns then FMPs have given 1 per cent,  3 per cent, 7 per cent and 8 per cent, respectively. Even looking at the current debt market scenario FMPs may continue to provide around 8 per cent returns. When it comes to liquidity, though the FMPs can be bought and sold in the secondary market, these are lightly traded on exchanges. So investments must be made with an intent to lock-in your money. If FMPs are held till maturity, the interest rate risks can be eliminated. However, it still carries the credit risk, which means that if the securities held by the FMPs are downgraded then it does have an impact on FMP returns.
 
So after understanding the characteristics of the FMPs, should you invest in them? Yes, conservative to moderately conservative may invest in them, considering a minimum 3-year time horizon. FMPs can be treated as a substitute for your bank FDs. That said, you must also look at the credit ratings of the underlying securities, as lower-rated securities may provide higher returns but can be riskier and only suitable for aggressive investors. But as a conservative investor one must consider investing in FMPs with high-rated underlying securities.