Fixed Maturity Plan

A Fixed Maturity Plan is a debt fund with an end date, holding bonds that end at roughly the same time.

That alignment is the entire design. An ordinary open-ended debt fund keeps buying and selling as money comes in and goes out, so what you eventually earn depends on where interest rates travel. An FMP buys a set of securities that mature when the scheme matures, holds them, and hands the proceeds back.

Because the portfolio is built around pre-identified investments and the scheme does not accept money post-NFO, the fund manager has little ongoing role. What the investor gets is more clarity on the likely returns if they stay invested until maturity — which the workbook is careful to add is not a guarantee or an assurance.

An FMP is a close-ended scheme, and every consequence of that applies.

You cannot redeem early. No redemption is allowed before the scheme's maturity. On maturity the money is returned.

Listing is compulsory, liquidity is not. To give investors an exit, the units must be listed on a recognised stock exchange. The workbook then says the quiet part: such listing does not guarantee liquidity, because trading volumes in these units may be very low or there may be no trading at all — and when a trade does happen, the price is often at a discount to NAV.

The credit profile is declared in advance. In the case of FMPs the AMC is allowed to disclose the proposed rating profile of the scheme before the portfolio is constructed. Having done so, it is then mandatory to invest in debt securities only within that proposed rating profile, or in less risky paper with a higher credit rating.

Interest-rate risk is neutralised by holding on. The term structure of interest rates risk moves the NAV of any debt scheme, but for a fixed maturity scheme it does not impact returns for investors who remain invested until maturity. Returns come from the yield on the debt securities.

A 1,150-day FMP raises Rs 400 crore in its NFO at the standard Rs 10 per unit, and declares a proposed rating profile of AAA and AA+ paper only.

The manager buys corporate bonds and government securities maturing around the scheme's maturity date at an average yield of 7.6 percent, against a total expense ratio of 0.35 percent. An investor who subscribes Rs 5,00,000 and holds to maturity is looking at roughly 7.25 percent a year before tax:

5,00,000 × (1.0725)^3.15  ≈  Rs 6,25,000  over the 1,150 days

Now interest rates rise sharply a year in. The market value of the bonds falls, so the NAV falls and the units quoted on the exchange fall further — a seller at that moment might get a price below even the reduced NAV, because the buyer is the one with all the options. The investor who does nothing is untouched: the bonds still mature at par on schedule, and the return arrives as planned.

That is the FMP bargain — visibility in exchange for being locked in.

FMPs appear three times: Chapter 2.2.4 introduces them among the categories, Chapter 4.6 (Fixed Maturity Plans) is devoted to them because they are one of the five simple and performing scheme types the new cadre of distributors may sell, and Chapter 3.4.8 covers the proposed rating profile. The Chapter 4 sample question — which of the following would be a close-ended mutual fund scheme — answers FMP. Expect also the point that listing is compulsory but does not guarantee liquidity, and that the driver of FMP returns is the yield on the underlying debt securities.

• An FMP is close-ended, so there is no redemption before maturity. The exchange is your only exit, and it is a poor one.
• "Clarity on likely returns" is not an assured return. The workbook says so twice. Indicative yields are not promises.
• Listing does not create liquidity. Volumes may be nil, and units commonly trade at a discount to NAV.
• The proposed rating profile binds the AMC. It may move to higher-rated paper, never to lower.
• Interest-rate risk still moves the NAV day to day; it is the investor who holds to maturity who is insulated, not the scheme.
• Do not confuse an FMP with a Target Maturity Fund: a TMF also matures on a set date but is open-ended in character and listed for exit before maturity.