Business Standard

Where TMFS score: Transparen­t, low on credit risk and cost-efficient

FMPS don’t face the issue of liquidity management but have higher costs


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 (MF) has 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. But the timing can still affect an FMP’S performanc­e, depending on the prevailing interest rates and market conditions,” says Shweta Rajani, head-mutual funds, Anand Rathi Wealth.

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 closedend nature, the impact of reinvestme­nt risk and liquidity management is reduced,” says Vishal Dhawan, board member, Associatio­n of Registered Investment Advisors (ARIA).

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 triplea 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.

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