A closed-ended debt fund having a specified lock-in term and a limited investment window is known as a fixed maturity plan. Individuals can only invest in such securities through subscription requests made by asset management companies during new fund offerings or NFOs. Debt securities such as certificates of deposit, Treasury bills, corporate bonds, and other debt securities make up the majority of this corpus.
Features of Fixed Maturity Plans:
A fixed maturity plan is based on the following factors-
1. Lock-in period:
This plans include a specified period of lock-in during which funds will not be able to be revoked. The principal objective of these stringent withdrawal rules is to ensure that the deposit remains locked up for a given tenure so that the underlying securities can generate maximum returns.
2. Close-ended schemes:
People who are seriously willing to invest in fixed-term/ close-ended schemes may subscribe to a new fund offer when the asset management companies have announced it. The new fund offer is available. For these kinds of funds that are traded on the share market like ordinary shares, only a limited number of NAV units are issued. Since a permanent deposit plan includes a predetermined period of lock-in, NAV units of such common funds may only be obtained during new fund offers.
Corporate debt investment instruments like public bonds and corporate bonds, non-convertible bonds, treasury bills, certificated deposits, trade papers, securitized debt instruments, etc., generate a fixed maturity plan return. The respective fund managers develop a portfolio to ensure that the minimum risk is associated with the overall corpus, given the relatively lower impacts of the stock market fluctuations of these securities.
4. Reliable Assets:
Portfolio managers solely choose to create a corpus with the highest fixed maturity plan returns by issuing debt instruments from leading organizations. It further reduces the risk factor of tools, making it one of the safest tools on the stock market.
Benefits of Fixed Maturity Plans:
The following benefits are offered by investing in a fixed maturity plan-
- Minimizes the risk: One of the safest forms of investment is a fixed maturity plan, which mainly focuses on debt securities of renowned core companies operating in individual countries. Debt instruments are a liability to a company, and so annual revenues are repaid first. Such fixed maturity mutual funds also have high credit ratings, as calculated by the country’s top credit rating agencies, thus attesting to the Scheme’s credibility.
- More stable: Debt instruments are subject to relatively lower fluctuation due to the volatility of the stock market. Furthermore, during a country’s recession, the bonds become rentable as investors move to less risky instruments, which allow individuals to enjoy high returns.
Restrictions of a Fixed maturity plan:
- Relatively low returns: Fixed maturity rates are relatively below the equity investments because the percentage of returns remains fixed during the entire investment term. As a result, there is no positive cyclical move in investors’ bursaries, as interest income for these schemes remains constant.
- Strict lock-in time: An investment in a fixed maturity scheme means that, without partial withdrawals, the capital amount must be held locked for a specified period. The liquidity requirements of investors could be burdened by this.
- Taxation: Best plan for fixed maturity in 2020, debt mutual funds are taxed accordingly. Short-term capital gains are subject to tax rates under each individual’s income tax slab, provided that the asset is held for less than three years. If a holding period exceeds three years, however, long-term capital gains are levied. After indexation adjustment, the total return produced is subject to a 20% long-term capital gain tax. Such indexing advantage ensures that investors have real growth in their returns due to a rise in the country’s total price level.
Who should take fixed maturity plans into consideration?
A maturity plan is ideal for people with low-risk skills and seeks secure tools with relatively lower fluctuations that match stock market fluctuations. These deposits have a fixed anticipated return, as at the time their issuance is declared interest concerning the underlying securities. It allows investors to carry out precise financial planning since the overall profit can be previously determined at low odds of deviations. A fixed maturity plan can therefore be an effective instrument for an investor to minimize the stock market investment risk factor.
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