Mutual fund advisors are recommending FMPs. Should you invest?

Some wealth managers are recommending fixed maturity plans or FMPs to their clients as they believe that FMPs are well placed due to yields climbing up in the last six months. The benchmark yield of 10-year government security touched the highest of 8.12 in the month of November. Even though the yields seem to be stabilising, some mutual fund managers believe that it is a good idea to lock in to FMPs at the current rates.

"FMPs are very good products for investors, especially those who opt for bank FDs. We saw the yields spike in the last couple of months. If you are getting to lock your money at 8-8.25 per cent in three years with the long-term capital gains and indexation, nothing better than that,” says Vikram Chokkar, Regional Head- North & East at Karvy Private Wealth.

Fixed maturity plans are returning around 8.0-8.2 per cent annually at this point. A three-year fixed deposit or FD with SBI offers 6.70 per cent. If an FMP is held for less than three years, the proceeds are added to the income and taxed as per the income tax slab applicable to the investor. If investments are held for more than three years, the returns are taxed at 20 per cent with the indexation benefit.


However, liquidity is an area where FMPs lag behind bank FDs. The lock-in period makes it difficult for an investor to get out of the scheme if they need the money urgently. “I think FMPs do look very attractive return wise at this point. But one must look at the liquidity factor, which plays a big part in investments. Looking at the yields, FMPs score over FDs at this point. They are well placed but they are not ideal for all investors,” says Arvind Chari, Head of Fixed Income, Quantum Mutual Fund.

Chari also advises investors to be cautious of the risk involved in the portfolio of FMPs. “There is a similar kind of risk in FMPs also as we are seeing in other debt schemes. They might have exposure to NBFCs etc which might hit the scheme later. Be extra cautious about the paper quality in the portfolio and choose schemes with high rated instruments,” says Chari.

Experts ask investors to not in FMPs only looking at the returns. “Are you okay with the three year lock-in period? Even if you are, don’t put all your eggs in one basket,” says Pankaj Gera, a Certified Financial Planner.