What are Fixed Maturity Plans? Features, Benefits & Risks Explained?

Fixed Maturity Plans (FMPs) are close-ended debt mutual funds with a fixed investment period. They invest in debt securities that generally mature around the same time as the scheme. FMPs may appeal to conservative investors seeking predictable maturity periods, but they are not the same as fixed deposits and do not offer guaranteed returns. This article covers FMP features, its benefits, risks and the key tax changes.

What is a Fixed Maturity Plan?

A Fixed Maturity Plan is a debt-oriented mutual fund scheme that is only available during a limited New Fund Offer window. Once the NFO closes, investors can no longer subscribe to new units from the fund house, and the fund manager buys a basket of debt instruments, such as government securities, certificates of deposit, commercial paper, and corporate bonds, chosen so their maturity dates line up with the scheme’s own end date.

This buy and hold approach is a crucial point. Because the manager is not actively trading the portfolio in response to interest rate swings, FMPs have lower exposure to mark-to-market volatility than actively managed open-ended debt funds, although their NAV can still fluctuate before maturity. FMPs tenures vary by scheme and can range from few months to several years.

Read also: Different Types of Investment Options

How does a Fixed Maturity Plan Work?

You can invest in an FMP only while its NFO is open, usually a window of a few days. Once it closes, your money is locked in until the scheme’s specified maturity date, and there is generally no facility for early redemption at the AMC’s counter.

The fund manager selects debt securities whose maturities align closely with the scheme’s own tenure. This matching is deliberate. If a corporate bond in the portfolio is due to mature the same week the FMP closes, the fund doesn’t need to sell it at a potentially unfavourable market price beforehand. It simply collects the maturity proceeds and pays investors out. Some FMPs offer listing on stock exchanges so units can technically be sold before maturity, but trading volumes tend to be thin, and liquidity here should not be counted on.

Key Features of Fixed Maturity Plans

A few structural features set FMPs apart from other different types of Mutual Funds in India available to Indian investors.

• Close ended structure, with entry allowed only during the NFO period.
• Fixed term,  ranging from a few months to several years depending on the scheme.
• Portfolio configuration designed to accommodate the length of the scheme, with maturities corresponding to the length of time the securities are expected to be in the portfolio, which can reduce interest rate risk if securities are held to maturity.
• Limited liquidity before maturity, even where exchange listing exists.

Unlike a Monthly Income Plan, which stays open for ongoing investment and typically carries some equity exposure, an FMP is almost entirely debt focused and shuts its doors to new money the moment the offer period ends.

Benefits of Investing in Fixed Maturity Plans

The core appeal of an FMP is predictability without sacrificing all the professional management that a mutual fund brings.

The portfolio is designed with securities that are designed to have maturities that coincide with the length of the scheme, so the yield of the portfolio at the time of the investment can be used as an indicator of what the portfolio may return, but this is not guaranteed. The structure also reduces the impact of interest rate movements as the securities approach maturity, although it does not eliminate market or credit risk.

For investors who already hold fixed deposits and want to diversify into a comparable debt oriented investment with potentially better post tax outcomes in certain tax brackets, an FMP can be a reasonable addition, provided the scheme’s maturity matches their actual cash flow needs.

Risks you Should Know before Investing

The trade off for that predictability is flexibility, and it is a real one.

Liquidity is the biggest constraint. Since these are close ended schemes, your capital is effectively locked until maturity, and even where units are listed on an exchange, buyers can be scarce, which means you might sell at a discount if you need cash urgently. Credit risk has not disappeared either; if an issuer in the portfolio defaults or is downgraded, that loss flows straight through to unit holders, no matter how carefully the fund manager selected the paper originally.

There is also an opportunity cost to weigh. If interest rates rise sharply after you have locked into an FMP, you are generally committed to the portfolio’s prevailing yield until maturity, while new instruments in the market pay more.

How are Fixed Maturity Plans Taxed?

This is the section where a lot of older material online is simply out of date, so it is worth being precise.

Before the Finance Act 2023 changes, FMPs held for more than three years qualified for long term capital gains treatment with indexation, which made them genuinely tax efficient against fixed deposits. That benefit no longer applies to fresh investments. For FMP units acquired on or after 1 April 2023, where the scheme falls within the definition of a Specified Mutual Fund under Section 50AA, gains are treated as short-term capital gains regardless of the holding period and are taxed at the applicable slab rate.

Additional Read: What is Investment?

One advantage does survive, though it is smaller than the old indexation benefit. FMP gains are taxed only in the year the scheme matures and pays out, unlike a cumulative fixed deposit where interest is deemed to accrue and gets taxed annually even if you never touch the money. For an investor in a higher slab holding a multi year FMP, that deferral can still offer a modest cash flow advantage, even though the effective rate paid is ultimately the same.

Fixed Maturity Plans vs Fixed Deposits

Investors frequently ask whether an FMP is simply a mutual fund version of a bank FD, and the honest answer is: not quite.

An FD from a scheduled bank offers a rate fixed at the time of booking, subject to the deposit terms and applicable bank conditions, whereas an FMP’s return depends on the actual performance of the underlying debt securities, so while it is designed to be predictable, it carries market and credit risk that a bank deposit does not. FDs also offer better liquidity in most cases, since premature withdrawal is usually possible with a penalty, something FMPs generally do not allow at all.

Conclusion

Fixed Maturity Plans occupy a genuine niche for investors who want more predictability than an open ended debt fund but are comfortable giving up liquidity that a bank FD would offer. The reduced interest rate sensitivity as the scheme approaches maturity is real, and so is the credit risk that never fully goes away. What has changed materially is the tax picture. Anyone still assuming FMPs come with an automatic indexation benefit is working off outdated information, since gains on investments made on or after 1 April 2023 are taxed at the applicable slab rate with no such relief. Match the tenure to your own cash flow timeline before committing, and treat the deferred taxation as a modest perk rather than the main reason to invest.

Frequently Asked Questions (FAQs)

Can I withdraw money from a Fixed Maturity Plan before it matures?

Generally, no. FMPs are close-ended schemes, and while some are listed on stock exchanges, trading volumes are usually thin, so early exit at a fair price is not guaranteed.

Are Fixed Maturity Plans safer than Fixed Deposits?

Not quite safer but different. Generally, FDs offer a fixed rate of return based on the deposit terms, and FMP returns are not guaranteed and depend on the securities underlying the investment.

Do Fixed Maturity Plans still offer Indexation benefits?

No, not for units bought on or after 1 April 2023. Under Section 50AA of the Income Tax Act, all gains on such units are treated as short term and taxed at the investor’s slab rate, with no indexation.

How is an FMP different from an Open ended Debt Fund?

An FMP only accepts investment during its NFO window and holds bonds to maturity, while an open ended debt fund allows investment and redemption on most business days and may trade its holdings actively.

Who should consider Investing in a Fixed Maturity Plan?

Investors with a clear, fixed time horizon who can commit money without needing it back early, and who are comfortable with debt market risk in exchange for potentially better post tax cash flow timing than a comparable fixed deposit.