A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What are FMPs and why should I invest in them?
Fixed maturity plans (FMPs) are closed-end debt funds with a fixed maturity a bit like fixed deposits. But FMPs are different from fixed deposits because they invest in marketable debt securities such as certificates of deposit (CDs), commercial documents (CPs), other money market instruments, corporate bonds, non-convertible bonds (NCDs) of reputable companies or government bonds, maturing in line with the possession of the scheme. Also, unlike fixed deposits, FMPs do not have a guaranteed rate of return.
Being closed with securities accrued in line with fund ownership, FMPs carry less liquidity and interest rate risk than open-ended debt funds. FMPs are a suitable option if you are looking to lock in your money for some time in the fixed period. FMPs offer tax-efficient returns through indexation to fixed deposits because the return of FMPs is adjusted to inflation and therefore taxed. Since debt funds enjoy a long-term capital gains tax of 20% after 3 years along with indexation benefits, three-year FMPs are affordable compared to FDs of the same mandate.
If you want to set aside some money for goals like vacations, your child’s college admission, or down payment for a home loan you plan for the next three to five years, you can invest the money in an FMP with a maturity close to your goal’s time horizon. If you don’t have a goal and are afraid to spend your savings unnecessarily, you can still invest in FMP to lock in your savings for a while as FMPs have maturities ranging from one month to five years.
