What Are Fixed Maturity Plans (FMPs)?
A Fixed Maturity Plan is a closed-ended debt mutual fund with a pre-defined maturity date — typically 3 months, 1 year, 3 years, or 5 years from the date of launch. The fund manager buys bonds whose maturities match the scheme's maturity date and holds them till the end. You get back your principal plus accrued interest on a fixed day, much like a fixed deposit.
SEBI classifies FMPs under the closed-ended debt fund umbrella. Unlike an open-ended scheme, you cannot buy or redeem units after the New Fund Offer (NFO) window closes. Units are listed on stock exchanges (BSE/NSE), but trading volume is so thin that you should plan to hold till maturity.
How an FMP Actually Works
- The AMC announces a 3-year FMP with an indicative yield of, say, 7.6% pre-tax.
- The NFO is open for 3-7 days. Minimum investment is usually ₹5,000.
- The fund manager invests the corpus in commercial papers, certificates of deposit, NCDs, and PSU bonds — all maturing close to the scheme's maturity date.
- The fund holds these to maturity. NAV moves daily on paper, but the buy-and-hold structure removes most reinvestment risk.
- On the maturity date, the units are redeemed automatically and credited to your bank account.
Returns Profile and Real Numbers
Recent FMP indicative yields in India range from 7.2% to 7.8% pre-tax for a 3-year maturity, depending on the credit mix. Compare this with:
- SBI 3-year FD: 6.75%
- HDFC Bank 3-year FD: 7.00%
- Banking & PSU debt fund (open-ended): 7.0%–7.5%
- Corporate bond fund: 7.3%–8.0%
On a ₹10 lakh investment in a 3-year FMP at 7.6%, you would expect to receive approximately ₹12.46 lakh at maturity (pre-tax). The number is not guaranteed — the indicative yield is just that, indicative — but the spread of error is much smaller than in an open-ended debt fund because the underlying bonds are held to maturity.
The Pre-2023 Tax Wrapper That Made FMPs Famous
Until 31 March 2023, FMPs were the tax-efficient debt instrument in India. A 3-year-plus FMP qualified for long-term capital gains treatment with indexation. With CII inflation around 5-6%, an FMP delivering 7.5% would often show a post-indexation gain of close to zero — meaning effectively zero tax on real returns. High-bracket investors loved them.
That ended with the Finance Act 2023.
Tax Treatment Today (Post-Budget 2024)
For all units of debt mutual funds purchased on or after 1 April 2023, including FMPs:
- All gains — whether short-term or long-term — are taxed at your slab rate.
- Indexation benefit is gone, regardless of holding period.
- The 30% bracket investor pays roughly the same tax on FMPs as on a fixed deposit.
This single change removed FMPs' biggest historic advantage. Today, the tax treatment of an FMP is essentially identical to that of a bank FD. The only remaining edge is timing: with an FMP you can defer recognition of gains till maturity (one tax event), whereas FD interest is added to income annually.
When You Should Use an FMP
- You want predictable, FD-like outcomes with a single tax event at maturity. Useful for someone in the new tax regime who wants to keep ITR filing simple.
- You have a defined goal date — kid's college fee in 3 years, down payment in 18 months — and you want the maturity to align.
- You want exposure to slightly higher-yielding corporate paper (PSU + high-grade NCDs) without taking duration risk. The buy-and-hold structure means rate movements don't whip your NAV around.
- You believe interest rates will fall over the FMP's tenure. Locking in today's yield protects you from reinvestment at lower rates.
When You Should Avoid FMPs
- You may need the money before maturity. Exchange liquidity is poor — bid-ask spreads of 1-2% are common, and on some days there are no buyers at all.
- You want to add to the position later. You can't. The NFO is your only window. After that, the corpus is frozen.
- You're a low-bracket investor (5% or zero). The post-tax math against a regular FD with DICGC insurance is no longer compelling.
- You want full transparency on holdings. While disclosures exist, the buy-and-hold nature means you're locked in even if a credit downgrade happens.
How to Evaluate an FMP Before Subscribing
- Indicative portfolio yield (YTM): Compare with prevailing FD rates of the same tenure. The FMP should offer at least a 0.5-0.75% spread to justify the lower liquidity.
- Credit quality of the indicative portfolio: Stick to FMPs that pre-disclose holdings of AAA / sovereign / A1+ only. Avoid AA or below — the higher yield is not worth the credit risk in a closed-ended structure where you can't exit.
- AMC track record: HDFC, ICICI Prudential, Aditya Birla Sun Life, Nippon India, and Kotak run FMPs regularly. Stick to the top 6-8 AMCs by debt AUM.
- Expense ratio: Direct plan TER for FMPs is typically 0.10%-0.30%. Anything above 0.50% on a regular plan eats into the spread you came for.
- Maturity date alignment: Match the maturity to within 1-2 months of when you need the money — ideally before, never after a known goal date.
Frequently Asked Questions
Can I redeem an FMP before maturity?
Not from the AMC. You can sell on the exchange where the FMP is listed, but liquidity is so thin that exit prices can be 1-3% below fair NAV. Treat FMPs as illiquid instruments till maturity.
Are FMP returns guaranteed?
No. The indicative yield is not a guarantee. Actual returns can vary slightly due to security-level prepayments, credit events, or expense changes. In practice, deviation from the indicative yield is typically less than 0.25%.
Are FMPs safer than open-ended debt funds?
For interest rate risk, yes — buy-and-hold removes mark-to-market volatility from your real outcome. For credit risk, no — if a bond defaults, an FMP cannot rotate out of it. Stick to AAA-only FMPs.
Why are AMCs launching fewer FMPs after 2023?
The indexation removal killed the main demand driver. Many AMCs still launch FMPs occasionally for institutional buckets, but retail interest has fallen sharply since FY24.
FMP vs Target Maturity Fund — what's the difference?
Target Maturity Funds (TMFs) are open-ended ETFs/index funds with a target date. They give you the same buy-and-hold yield logic as an FMP, but you can buy and sell at any time. For most retail investors today, a TMF tracking the CRISIL IBX or Nifty PSU Bond index is a strictly better choice than an FMP.
Are FMPs eligible for SIPs?
No. FMPs accept lump-sum subscriptions only during the NFO window. There is no SIP option.
The Bottom Line
Fixed Maturity Plans were a brilliant tax-arbitrage product when indexation was on the table. With indexation gone, they have collapsed into the same tax bucket as FDs and other debt funds, while keeping the worst feature: zero liquidity. The slight yield pickup over FDs is real, but for the same goal alignment most investors are better served by a Target Maturity Fund (open-ended, daily liquidity, identical buy-and-hold logic) or a Banking & PSU debt fund. Use an FMP only if you have a hard goal date, you've found a 3-5 year FMP from a top AMC with AAA-only paper, and you are absolutely certain you will not need to touch the money before maturity.