Things to know about FMPs

The mutual fund houses launch Fixed Maturity Plans (FMPs) for the investors. Not many investors may be aware of what these plans entail, how they work and which one to choose from the plethora of plans launched from time to time. Let us look at some salient features of FMPs and the pros and cons of investing in these plans.

The FMPs come with fixed maturity periods of varying duration and, therefore, an investor investing in an FMP will not have access to the money during the period of the lock-in. Of course, FMPs are listed, but these are thinly traded, if at all. Hence, FMPs are suitable for those who foresee no liquidity needs during the duration of the scheme, while these are unsuitable for those who may be in need of cash before the end of the FMP maturity period. In view of this, one has to match one’s investment time horizon with the tenure of the FMP.

FMPs are closed-ended funds so one can invest in FMPs only when these are launched as new funds. One needs to check the quality of the underlying paper to avoid the risk of default and choose the scheme that invests in highest quality instruments (AAA or AA rated or PSU bonds). For risk-averse investors, it is advisable to go for a plan with a higher tenure as this will facilitate locking in higher yields for a long period.