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Why an FMP is a good investment

Value Research | May 24, 2005

  Fixed Maturity Plans seem to be the latest bug to bite the Indian mutual fund industry.

Practically every mutual fund house is dishing out new FMPs. Since January 2005, almost 40 FMPs have been launched with many more lined up in the near future.

What sets them apart?

FMPs are mutual fund schemes that last only for a fixed period of time.

It could be as little as 15 days or as long as five years.

They invest primarily in fixed return investments like government bonds and money market instruments (very short-term fixed return investments).

To understand how these schemes work, read All about FMPs.

Why they make a good investment

Between 1998 and 2003, interest rates feel dramatically.

Currently, the economy is at a juncture which could result in a U-turn in the trend with interest rates heading upward.

FMPs are great investment option when there is a lot of interest rate volatility.

FMPs invest in instruments that mature at the same time their schemes come to an end. So a 90-day FMP will invest in instruments that mature within this period.

This insulates such schemes from volatility in the interest rates.

When interest rates in the market rise, the price of existing bonds (the selling price) falls. Because nobody wants to buy a bond that offers a lower interest rate.

These schemes manage to mitigate the interest rate risk because the fund manager does not have to keep buying and selling bonds (and such fixed return investments) to make a profit.

He can just buy them and hold onto maturity.

Are they worth investing in?

1. If you want to invest your money for only a short period of time, then it is a good option. Since FMPs mature in a particular timeframe, you can get a scheme for as short as 15 days.

2. Do you want to play safe with your money? In that case, you should invest in fixed-return investments. But, do note, you are not given an assured return in the case of an FMP. Though chances are you will get a slightly higher return than what you would get in a bank fixed deposit.

3. Invest money you are quite sure you are not going to need. You can only withdraw the money during pre-set time periods. It is not an open-ended fund that allows you to exit (sell your units) whenever you want.

4. If you think interest rates are going to rise, what you can do is invest in FMPs that will mature quickly. In this way, your money will not be blocked for too long and you can reinvest it later at a higher interest rate.

Value Research

 




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