Fixed Maturity Plans (FMPs) are closed-ended debt mutual funds that offer a defined tenure and stable returns. This guide explains how FMPs work, their benefits, risks, and taxation to help you decide if they fit your investment goals.
Many investors want a debt option that doesn’t swing with daily market movements or push them to redeem early; especially when they’re saving with a specific date or goal in mind. Yet most debt products either stay open for withdrawals or see their NAV move every time interest rates shift, which makes it harder for you to stay invested with confidence.
FMPs work differently. They lock in your money for a fixed tenure and invest only in securities that mature at the same time as the plan. This approach reduces the impact of short-term volatility on your final returns.
In the sections ahead, we’ll break down how FMPs work, their advantages and risks, and whether they fit well into your broader investment strategy.
What is a Fixed Maturity Plan (FMP)?
An FMP is a closed-ended debt mutual fund that invests in fixed-income instruments such as investment-grade corporate bonds, treasury bills, and certificates of deposit. Unlike open-ended mutual funds, you can only invest in an FMP during its launch period, known as the New Fund Offer (NFO). Once the subscription window closes, no new investments are allowed, and you have to hold it till maturity, just like a fixed deposit with a lock-in period.
Here’s a quick snapshot of what defines an FMP:
- Fixed tenure: Usually ranges from a few months to several years, clearly mentioned at launch
- Closed-ended structure: Investment is possible only during the NFO period
- Debt-focused portfolio: Invests primarily in fixed-income instruments like corporate bonds, government securities, and money market instruments
- Predictable returns: Returns are not guaranteed but tend to be stable since underlying securities are held till maturity
Now that you have a sense of what FMPs are, let’s look at how they function, and what makes their structure distinct from traditional open-ended debt funds.
How Does a Fixed Maturity Plan Work?
An FMP starts when an asset management company (AMC) launches an NFO, with a short subscription window. After collecting the money, the fund manager invests it across a mix of high-quality debt instruments such as corporate bonds, commercial papers (CPs), government securities (G-Secs), and certificates of deposit (CDs). The key is that every investment matures around the same time as the plan itself. For example, if the FMP is of a 3-year period, all the debt securities within the plan will have 3-year maturities.
So, when the plan reaches its end date, you receive your principal along with the interest earned over the period. While the final return can vary slightly based on the instruments chosen, it generally remains steady, offering you a sense of predictability that’s often hard to find elsewhere.
For example, imagine you invest ₹1,00,000 in a three-year FMP with an expected yield of 7%. When the plan matures, you might receive roughly ₹1,23,000, assuming returns materialize as expected. Once you know how an FMP functions, the next factor to consider is its tax treatment; something that plays a major role in evaluating its real-world returns.
Taxation on Fixed Maturity Plan
For investments made after April 1, 2023, FMPs are no longer eligible for long-term capital gains tax with indexation benefits. All gains are now taxed as Short-Term Capital Gains (STCG), which is added to the investor’s total income and taxed at their slab rate. The advantage of indexation over fixed deposits is now largely diminished, though FMPs may still offer higher pre-tax returns.
With this basic structure in mind, let’s look at the key advantages that make FMPs a preferred choice for many fixed-income investors like you.
Benefits of Investing in Fixed Maturity Plans
FMPs bridge the gap between fixed deposits and debt funds, offering the best of both worlds. Here’s why many investors find them attractive:
- Predictable and stable returns
Since the fund manager holds the investments until maturity, returns are largely insulated from daily market fluctuations. This gives investors a reasonable degree of predictability.
- Low-interest rate risk
Because of the hold-to-maturity strategy, FMPs aren’t as sensitive to short-term interest rate changes as open-ended debt funds.
- Diversified exposure
An FMP invests across various debt instruments, reducing the impact of default or credit risk from any single issuer.
- No premature withdrawals
The closed-ended nature of fixed maturity plans discourages investors from impulsive redemptions, ensuring they stay invested for the intended duration, which is a subtle advantage for disciplined investing.
However, as with any investment, the stability of FMPs doesn’t come without trade-offs. Understanding the risks associated with them helps in making a balanced decision.
Risks Involved in FMPs
While FMPs aim for predictability, they’re not entirely risk-free. Here are the key points you should be aware of:
- Credit risk
If any of the underlying issuers default, it can impact your returns. While fund managers choose high-quality securities, the risk cannot be eliminated completely.
- Liquidity risk
Since FMPs are closed-ended, you cannot redeem your investment before maturity. Though they are listed on stock exchanges, finding buyers can be difficult, making them illiquid.
- Interest rate risk (before maturity)
The value of underlying securities can fluctuate if interest rates change. However, since FMPs are held to maturity, this impact is limited unless you try to sell early.
- Uncertainty risk
Unlike fixed deposits, returns are not guaranteed with FMPs. The actual payout depends on how the underlying instruments perform.
Given their similarities to debt mutual funds, many investors often wonder—if both invest in debt instruments, why discuss FMPs separately? Let’s clear that up.
Fixed Maturity Plans vs Debt Mutual Funds
While both FMPs and debt mutual funds invest in fixed-income instruments, they differ in structure, flexibility, and tax treatment. Here’s how they stack up:
| Feature | Fixed Maturity Plan | Debt Mutual Fund |
| Structure | Closed-ended | Open-ended |
| Investment Window | Only during NFO | Anytime |
| Liquidity | Locked till maturity (exchange listing is illiquid) | Can redeem anytime |
| Interest Rate Sensitivity | Low (hold-to-maturity) | Moderate to high |
| Return Guarantee | Indicative, not assured | Market-linked |
| Taxation (3+ years) | For investments made after April 1, 2023, FMPs are no longer eligible for long-term capital gains tax with indexation benefits. | For investments made on or after April 1, 2023, any gains from transfer, redemption, or maturity are classified as short-term capital gains and taxed at the investor’s applicable slab rate, regardless of the holding period. |
| Suitable For | Investors seeking predictable returns and discipline | Investors needing flexibility and liquidity |
Now that you understand how FMPs differ from regular debt funds, the final step is knowing when and for whom they make the most sense.
Who Should Invest in Fixed Maturity Plans?
FMPs are ideal for investors who want a balance of safety, predictability, and a defined maturity date without daily market noise. You should consider FMPs if you:
- Have a fixed investment horizon
You know when you’ll need the money. For example, you want to invest a lump sum knowing you will want the same amount after 3 years, so you invest in an FMP maturing around the same tenure.
- Prefer stability over liquidity
You don’t need immediate access to the funds and are comfortable locking in your investment.
- Seek moderate risk with predictable outcomes
If you’re cautious but still want to beat traditional savings returns, FMPs can fit well in your portfolio.
- Diversify your debt exposure
Adding FMPs alongside other fixed-income investments spreads risk and enhances the stability of your portfolio.
While FMPs can be an efficient short- to medium-term tool, they aren’t one-size-fits-all. Before investing, consult a financial advisor to assess whether their tenure, liquidity profile, and risk-return balance align with your personal goals.
Final Thoughts
An FMP’s fixed timeline and transparent portfolio help you plan goals where you already know the exact horizon. They work best when you’re comfortable staying invested, especially now that tax rules have changed. If you prefer stability over constant liquidity and want a calmer, goal-linked debt option, an FMP can play a purposeful role in strengthening your overall portfolio.
