What Are Fixed Maturity Plans?
The falling interest rate in savings accounts and fixed deposits (FDs) has left investors wondering where to park their funds. There are a number of investment options available in the market, which may give a high return at a low risk. Mutual funds are considered as a convenient option for the long-term due to the benefit of compounding of interest and the diversification of funds.
A fixed maturity plan is a type of debt fund that comes with a specific holding period. It is a close-ended fund, which is not available for subscription throughout the year. The fund usually opens for two to five days. The fund house announces an opening date and a closing date within which interested investors are required to invest. After the closing date, the offer does not exist.
How Do Fixed Maturity Plans Work?
Mutual funds are managed by fund managers who invest in various types of debt assets. An allocation of funds in a fixed maturity plan means an investment in debt securities that provide high returns. The funds are usually put in commercial papers, corporate bonds, money market instruments, certificate of deposits, and sometimes in bank FDs. The fund manager may also opt to invest in a combination of the securities to increase return and reduce risk through diversification.
What Are The Taxes Benefits Of Fixed Maturity Plans?
The dividend received on fixed maturity plan is tax in the hands of the investor. In case of a short-term capital gain, the gain will be taxed according to the income tax slab of the investor. In case of a long-term capital gain, the gain is taxed at 20% with indexation and 10% without indexation.
Difference Between Fixed Maturity Plans And Fixed Deposits?
If you compare both the options, FDs are safer to park your savings as they have a fixed return, but the returns from the same are substantially lower than fixed maturity plans. FDs also allow premature withdrawal while you cannot redeem the fund before the end of the holding period in case of a fixed maturity plan. As an investor, you should consider your financial plan before investing in the fund, if it meets your requirements.
Should You Invest In Fixed Maturity Plans?
Not many investors are aware of the different investment options and tend to choose FDs for a fixed income and low risk. However, fixed maturity plan is an ideal alternative for investors who may afford to park their funds for a minimum period of three years to get good returns. Investors who are willing to invest in fixed maturity plans should keep a check on the fund opening date and subscribe within the given period. Do remember to consider the top-performing debt funds and the returns generated by them before you make your decision.
How To Invest In Fixed Maturity Plans?
As mentioned earlier, this is a close-ended fund and the tenure depends on the type of fund you choose to invest in. It usually varies from one month to five years. There is no frequent buying and selling of securities in case of this plan, which in turn reduces the expense associated with fixed maturity plans.
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