Fixed maturity plans are a common form of debt investments offered by mutual funds. They are tax-efficient and offer attractive returns relative to other investments such as bank deposits at fixed prices. They are however more complicated as time deposits with a bank or liquid mutual funds.

There are many factors that influence the decision to invest in the plans for fixed maturity. These are the estimates of cash flows safeguarding investments against market volatility and taking advantage of the interest rates in the market.

As FMPs block funds for a certain time limit, they are suitable for investors who seek to have their funds blocked for a particular time. FMP is also a good investment tool for investors who seek a good return on their investment after a fixed period. It is also profitable for investors who do not care about the volatility of the market during the investment.

When considering an investment in a FMP, investors should take into account the current interest rates on government bonds, corporate bonds, commercial papers and other short term fixed income products. This will give the investor an idea of the return that can be expected from the FMP. This will also help the investor to decide whether to invest their money into FMPs or directly through other fixed income products.

PAF is generally preferred by investors who are indifferent to market fluctuations in the short term. However, there are some who also have FAP equity components. Investors who invest in the plans should be aware that the risk of higher stock market in the short term versus long term.

FMPs are generally classified as low risk investments. However their closed-ended nature does not really protect them against certain risks. These include market risk, credit risk and liquidity risks. AS FMPs have the potential for capital depreciation, investors should look into the risks involved before deciding to invest in an FMP.

FMP are subject to high market risk when equity components are included in the plan. As the plan has a fixed maturity date, the fund manager is required to take the calls for short-term measures. This can lead to operating losses as the fund manager does not have the luxury of time to hold on to investments.

Safeguarding the investor against interest rate risk is one of the most important factors in the design of FMP. However, it is possible that interest rates may fall between when the Fund has been launched and the money is collected. The investment is then made at that lower interest rate.

Another risk involved with FMPs is that of gapping. This happens if the fund manager is unable to find assets that mature exactly with the plan. This therefore leads to the risk of asset liability mismatch. This can negate the immunization of the investment.

Investors should also watch out for terms in the plan that effect large investors. For example, if large investors are given low exit loads, this may lead to them pulling their investment earlier than the stipulated date. This will substantially affect the returns on the FMP.

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