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Fixed maturity plans: Higher returns, lower risks

August 22, 2007
As a college-going teenager I remember getting Rs 25 as pocket money everyday. After spending on the bus fare and snacks I would still be left with Rs 5 that, as a habit, went into a small piggy bank. This way I would collect roughly Rs 130 every month (assuming a month has 30 days and, of course, Sunday's a holiday) and Rs 1560 by the end of every year.

My mother, who was very good in matters related to money, asked me to put Rs 500 out of my savings in a bank fixed deposit and the rest in gold, National Saving Certificates, NSCs, and other such things (assets) that would help me spread my risks.

"Investments are like walking on a thin rope. In case you fall down, you need some support so that you don't suffer badly," she would always tell me.

"Yes, what if you lose money on some of your investments?" she explained. It was then that I understood that you should never put all your eggs in one basket.

After completing graduation, I also learned that the essence of a sound financial strategy is a diverse mix of assets with different levels of risk. Fixed deposits and small savings schemes like NSCs are the traditional options when it comes to low-risk financial products but in recent years fixed maturity plans, FMPs, have become popular with investors seeking a higher return while still maintaining a small level of risk.

What are fixed maturity plans?

Fixed maturity plans are investment schemes, created by mutual fund houses, which invest primarily in safe assets like high-grade corporate bonds. As the name suggests these plans have a fixed maturity ranging from 3 months to 3 years.

FMPs have become quite popular of late with almost Rs 90,000 crore invested in them in 2006. As a low-risk asset they are relatively attractive at a time of high volatility in equity markets. Furthermore they have significant tax advantages compared to other-low-risk assets like fixed deposits.

Another reason for their recent popularity is the rising interest rates that make debt-based products relatively attractive.

Text: NS Sawaikar
Illustrations: Dominic Xavier
Also read: How to make money from your hobbies

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