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FMPs Or TMFs? Where Should You Invest?

By Bindisha Sarang
April 22, 2024 09:59 IST
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FMPs remain an option for investors who believe interest rates could head downward over time and wish to lock in the current rates.

TMFs have very low expense ratios, which makes them cost-efficient.

IMAGE: Kindly note the image has been posted only for representational purposes. Photograph: Kind courtesy Ravi Roshan/

Fund houses are currently coming out with the new fund offers (NFOs) of both fixed maturity plans (FMPs) and target maturity funds (TMFs).

Kotak Mahindra Mutual Fund launched Kotak Fixed Maturity Plan Series 329 90 Days while Nippon India MF has come out with Nippon India Fixed Maturity Plan XLVI Series 5.

NFOs of TMFs are currently on from Axis MF (Axis CRISIL IBX SDL June 2034 Debt Index Fund) and Kotak Mahindra MF (Kotak Nifty AAA Bond Jun 2025 HTM Index Fund).

Date of launch no longer relevant

Earlier, fund houses launched FMPs towards the year-end, enabling investors to get indexation benefit for an extra year.

From April 1, 2023 onwards, gains made in debt mutual funds are taxed at the investor's slab rate.

"With the loss of indexation benefit in debt funds, the timing of FMP launches is not relevant for tax planning," says Shweta Rajani, head-mutual funds, Anand Rathi Wealth.

"But the timing can still affect an FMP's performance, depending on the prevailing interest rates and market conditions," Rajani adds.

Pros and cons of FMPs

FMPs remain an option for investors who believe interest rates could head downward over time and wish to lock in the current rates.

"Since inflows and outflows into these funds are controlled due to their closed-end nature, the impact of reinvestment risk and liquidity management is reduced," says Vishal Dhawan, board member, Association of Registered Investment Advisors.

Their closed-end nature, however, makes them illiquid. Their units can't be sold back to the fund house during their tenure.

While FMPs are listed on the stock exchanges, trading volumes are very low, which forces investors to sell their units at a significant discount.

Investors can't see an FMP's exact portfolio but can only get to know about the indicative portfolio at the time of launch.

Some FMPs tend to take higher credit risk in the quest for higher returns.

TMFs: You can check out the index

TMFs invest in a specific index. Most of these indexes comprise government securities (G-Secs), state development loans (SDLs) and triple-A corporate bonds. They have high-quality portfolios with very low credit risk.

Investors can view the index's composition at the time of launch.

TMFs in the index fund format can be sold back to the fund house. Those in the exchange-traded fund (ETF) format can be sold on the stock exchanges. Hence, they tend to be more liquid.

TMFs have very low expense ratios, which makes them cost-efficient.

"While most FMPs have a tenure between one and three years, TMFs offer a wider choice of maturity periods ranging from three to 10 years," says Jinal Mehta, a certified financial planner and founder of Beyond Learning Finance.

"This can be helpful for investors trying to lock into current interest rates to safeguard against a structural downturn in interest rates over, say, a decade," says Dhawan.

Being open-ended, a TMF, however, has to deal with the issue of liquidity management.

"A TMF may end up being less efficient if it continues to get inflows at lower interest rates, as this will bring down the overall portfolio yield," says Dhawan.

Which should you go for?

There are two reasons why investors traditionally went for FMPs: Tax benefit and the fact that interest-rate fluctuations don't affect them.

"Under the current scenario, there is no tax advantage to either of these categories. An FMP also comes with a much higher expense ratio," says Mehta.

TMFs track a bond index, which makes them transparent. They are open-ended, carry very low credit risk, and have low expense ratios.

According to Dhawan, investors comfortable with the lock-in and illiquidity may look at FMPs.

"For investors seeking flexibility, with a possible return that is lower than what the yields show at the time of investment, TMFs may be a preferred option," he says.

Some experts prefer TMFs. "They offer a wider variety of maturities, making it easier to link a goal to a TMF's maturity date," says Mehta.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/

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Bindisha Sarang
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