Fixed Maturity Plans vs Fixed Deposits


Fixed Maturity Plans (FMPs) are closed-end debt funds having a fixed maturity period.

Unlike other open-end debt funds, FMPs are not available for subscription on a continuous basis.

A fund house comes out with a New Fund Offer (NFO) for a specific duration. NFO will have an opening date and a closing date. Upon expiry of the closing date, the offer to invest ceases to exist. The offer document indicates the instruments in which the fund proposes to invest as well as floor & ceiling within 5% range of the intended allocation.

FMPs usually invest in debt instruments like Treasury Bills, Commercial Papers, Certificate of Deposits, Government Bonds, Corporate Bonds, and Bank Fixed Deposits.

Based on the duration of the scheme, fund manager allocates the money in instruments of similar maturity. Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy. There is no frequent buying and selling of debt securities like other open-end debt funds. This helps keep the expense ratio of FMPs at lower level vis-à-vis other debt funds. (average expense ratios are around 0.4%)

FMPs and FDs have lot of similarities between them. Both require you to stay invested for a fixed duration. Both of them are available in varying maturities to suit your convenience.

However there is a difference when it comes to returns perspective. FDs offer a guaranteed return while FMPs show an indicative return. It means that the return offered by FMPs is not assured but only indicative in nature. There is a chance of actual returns being higher or lower than the returns indicated.

Fixed Deposits Fixed Maturity Plans
Returns Guaranteed returns Indicative returns
Maturity Varying maturity periods Varying maturity periods
Liquidity Ease of premature redemption, higher liquidity Restricted liquidity
Tax Efficiency Interest income is added to your annual income and taxed as per the applicable slab. FMP Dividend – a Dividend Distribution tax is levied

FMP Growth – Capital gains tax apply

Tax Efficiency:

One can avail indexation benefit on capital gains if FMPs are held for more than three years. Indexation benefit is not available for Fixed deposits. Thus FMPs become more tax efficient if held for more than three years.  FMPs are suitable vehicles for investors who fall in the higher income slabs.

Most FMP NFOs offered during the month have a tenor of 37 months and beyond. So the maturity typically extends to FY 2021-2022. Thus inflation index pertaining to FY 2021-2022 is reckoned for calculating cost of acquisition. Even if one assumes an average cost inflation index of 4% per annum for next 4 years, indexation benefit of 16% will be available for the investor. If inflation indexation for next four years is an average of 5% per annum, then cost of acquisition is 20% higher and one may end up  paying only a nominal amount as capital gains  tax on the income earned.

Look for the investment objective of the scheme, indicative yield and investment strategy. Once you are in sync with these, invest an amount that you can leave invested for three years or more to reap the benefits of tax efficient returns.




Stay Invested


Stay Invested :

It is but a common tendency that investors become restless when the schemes they invested into do not perform as per their expectations. One should bear in mind that a scheme may not perform in the short term but may give a better return in the long term. So it is important that investors take a decision of moving out of a scheme only after observing the performance of the scheme vis a vis a benchmark or a peer at least for a period of 8 quarters. The following points need to be considered while shifting between the Funds:

  • Does the scheme return consistently beating the inflation?
  • Does the existing investment outperforming against benchmark/Other Peers?
  • How long did you stay invested in the current scheme?
  • Associated Cost & Reinvestment risks?


  1. Does the scheme return consistently beating the inflation: The ultimate objective of investing in Equities via Mutual Fund route is to beat the inflation. If your scheme returns are not beating the inflation consistently, then you may consider moving to a better performing scheme with similar investment objectives.
  2. Does the existing investment outperforming against benchmarks /Other Peers: Quite often we come across investors who are unduly worried about the performance of their MF schemes. The non-performance could only be a short time phenomenon. It is not every time your fund’s performance would be the best among the categories. For Example: In a Cricket match, it is not always that Australia would win every international tournament. At times they also underperform in the tournaments and it doesn’t mean that they will not perform well in future. Similarly in Capital Markets, every day is a new match and every quarter a series. One may need to consider moving into a better performing scheme only when the scheme performance is consistently below the category average/benchmark.
  3. How long did you stay invested in current scheme: Timing the market is a very difficult art. Instead time in the market is within the investors’ control. It is observed that long term investments ride off volatility and give steady returns. At times we see investors who had invested six months back that too in SIP mode, get restless as their investments are turning negative or underperforming other peers. In mutual funds one needs to stay with a scheme for at least 2 years. Even after 2 years if the scheme continues to underperform the peers/benchmark then one should exit the scheme and move to a better performing one.

Associated Cost & Reinvestment risks: Frequent churning of portfolio is not advised. Whenever investors are thinking of shifting the investments from one fund/scheme to another fund/scheme, they need to understand the most important risk i.e. Reinvestment risk associated with it. Also he should note the cost associated with it in the form of Exit loads. The time lag from redeeming and reinvesting may sometimes alter the NAVs such that one may end up reinvesting at a higher NAV thus impacting the overall performance of the portfolio. There were many instances when the scheme from which one has exited starts performing well and the one entered not doing well. So it is paramount that one should track the performance atleast for 6 quarters before taking any decision.

Asset Allocation Strategies



Asset Allocation strategy is a dynamic process. It plays a key role in determining the overall risk return of the portfolio. A model portfolio looks something like this:

Equity: 70% Debt: 10% Real Estate: 15% Gold: 5%


However there is no one ‘fit for all’ solution. A portfolio’s asset mix should reflect the long and short term financial goals at any time. Let us dwell upon a few strategies of establishing asset allocations and examine their basic management principles.

Strategic Asset Allocation:

This method is based on the over-all expected return of the portfolio. It adheres to a proportional mix of assets which together would give the expected return. If one aims at a return of 13% on his portfolio and if stocks  historically have given an annual return of 15% and bonds 8%, then a mix of 60% in stocks and 40% in bonds would help him achieve his goal of 13% return. Since equity markets are volatile a portion of the investments are kept in bonds thus reducing the risk. This is the simplest and passive investment strategy of all. It is a buy-and-hold strategy, and a shift in values of assets causes a drift from the initially established expected return.

Constant Weighting Asset Allocation:

A constant-weighting approach to asset allocation addresses the problem of undue variations in the expected return. This approach needs continuous rebalancing the portfolio depending on the shift in values of the asset classes.  If one asset has decreased in its value you will buy more of that asset, and if the value increases you sell a portion of it. This helps in rebalancing the portfolio and the expected returns are in tune with the financial goal. There is no hard-and-fast rule for timing portfolio rebalancing. A common rule of thumb is that whenever an asset class moves by more than 5% in value, we will rebalance the portfolio such that the original expected return is maintained.

Tactical Asset Allocation:

This is a moderately active strategy. While the asset allocation is strategized in tune with long term financial objectives, a portion of the assets is positioned in such a way as to benefit from any short term profit opportunity. Overall strategic asset mix is returned to, once the desired short term profits are achieved.  This strategy demands a lot of discipline and one should be well versed with markets to recognize when short-term opportunities have run their course, and then rebalance the portfolio to its long-term asset position.

Dynamic Asset Allocation:

This is a very active asset allocation strategy. This is polar opposite of constant-weighting strategy. With this strategy one would sell assets that are declining and buy assets that are increasing in value. For example, if the stock market is showing weakness, you sell stocks in anticipation of further correction in the market; and if the market is bullish, you buy stocks expecting further gains in the market.

Insured Asset Allocation:

This strategy involves in establishing a base portfolio value, below which the value should not be allowed to drop. An active management strategy is exercised to increase the return on portfolio as much as possible provided the portfolio stays above the base value.  If the portfolio should ever drop to the base level, you invest in risk-free assets so that the base value becomes fixed. This strategy may be suitable for risk-averse investors who desire a certain level of active management but understand the security of establishing a guaranteed floor below which the portfolio is not allowed to decline. Investors who wish to maintain a minimum standard of living post retirement can look at this strategy.


Asset allocation strategy depends on the investor’s financial goals, earning capacity, age and risk tolerance profile. It can be an active process to varying degrees or strictly passive in nature. The above strategies are only general guidelines on how investors can use asset allocation as their core strategy in wealth creation or income generation.

Asset Allocation – The most important aspect is always missed out!!


The year 2017 has been a fabulous year for equity investors. BSE Sensex has given a return of 28.05% whereas Nifty 50 has delivered 28.69%

There will be a natural inclination for all those investors who missed the bus to think shifting their investments from other asset classes to equity and equity related Mutual Funds. This may skew the risk-reward unfavorably if markets do not perform as expected. This is where they need the professional advice of a Financial Planner in getting their investments allocated proportionately to various asset classes.  This approach optimizes the return while reducing the risk on the portfolio.

What is Asset Allocation?  

It is an investment strategy that attempts to balance risk versus reward by adjusting the percentage (weights) of each asset in the investment portfolio based on the investor’s risk appetite, financial goals and the time horizon to reach these goals. A Financial Planner looks at different asset classes and how they respond to market events. The trick is to allocate your resources among different asset classes which do not respond the same way to market forces, i.e., they do not have similar co-relation. A proper asset allocation reduces the volatility of the portfolio.

Asset allocation will vary from one investor to another. An aggressive investor can look at investing 75% in equity and equity related mutual funds, 20% in Fixed Income funds and 5% in gold, while a risk averse investor may look at investing more into low risk assets like Fixed Income. It mostly depends on the need and risk profile of the individual.

A retired person may invest a significant portion of his savings in a Fixed Income portfolio which generates a steady source of retirement income. His need is to preserve what he has while living on the proceeds. Growth is not a consideration for him. However, a young corporate employee will be looking at building wealth and can afford to be an aggressive investor and allocate most of the resources to Equity.

While there is no fixed formula for asset allocation, a prudent investor can look at 60% in Equity, 30% in Fixed Income, 5% in gold, 5% in bank deposits.

Pitfalls one should avoid while preparing the Asset Allocation:

Ignoring short term funds requirement (Emergency or Contingency Fund):  Investors tend to invest their entire surplus without allocating for contingencies. An amount to take care of the investor’s present life style for at least 6 months should be set aside as a cushion. This could be for contingencies like loss of job, medical emergencies etc., It is suggested that this amount is invested in ultra short term debt funds or liquid funds..

Over weightage on Physical assets: It is a general tendency to acquire physical assets as these give a false sense of security.  Over weightage to Physical assets, particularly real estate, runs the risk of illiquidity and is very opaque in pricing.

We will talk about the various asset allocation strategies next week. Happy investing…….

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