Fixed Maturity Funds are a type of debt mutual fund designed to invest in securities that mature at a fixed time. It is usually within 3 to 5 years. These funds are ideal for conservative investors looking for stable returns with minimal risk. FMFs are similar to Fixed Deposits (FDs), but they offer the added advantage of liquidity and potential for better returns.
Key Features of Fixed Maturity Funds:
- Defined Maturity Period: Investors know exactly when their investment will mature, making it easier to plan.
- Stable Returns: Since the fund holds bonds until maturity, returns tend to be more predictable than in other types of mutual funds.
- Lower Risk: FMFs are less volatile compared to equity funds, as they are not affected by stock market fluctuations.
How Fixed Maturity Funds Work:
FMFs pool money from various investors to invest in debt instruments with a fixed tenure. The funds ensure that the investments align with the fund’s maturity date. The returns from these funds primarily come from the interest earned on the underlying bonds or securities. These investments are held until maturity. FMFs tend to be less sensitive to interest rate fluctuations compared to other types of debt funds.
Since the maturity period is fixed, investors know when they can expect to redeem their investment. These funds are considered relatively safer, as the risk of capital loss is lower if the bonds are held till maturity. However, the returns are not guaranteed and depend on the performance of the bonds or securities in the portfolio.
Advantages of FMFs:
- Predictability: Since the portfolio has a fixed maturity, it offers a predictable return over time, making it suitable for conservative investors.
- Lower Interest Rate Risk: Unlike open-ended debt funds, FMFs are less affected by interest rate changes as the securities are held until maturity.
- Tax Efficiency: If held for more than three years, FMFs offer long-term capital gains tax benefits, making them tax-efficient compared to other fixed-income investments.
Example:
You decide to invest in a Fixed Maturity Fund that has a maturity period of 3 years. The fund invests in a mix of bonds and fixed-income securities that will mature in 3 years. You invest ₹1,00,000 in the fund, and based on the current market conditions, the expected return is 7% annually. After 3 years, assuming the bonds perform as expected, you will receive the initial principal along with the interest earned over the period.
Disadvantages of FMFs:
- Liquidity: FMFs are typically not as liquid as other mutual funds. Since they have a fixed maturity, investors may face difficulty in redeeming their units before the maturity date.
- Limited Returns: FMFs usually provide returns that are lower than equity mutual funds, and there is no potential for higher capital gains.
Conclusion:
FMFs are a great option for conservative investors who are looking for stable returns and have a specific investment horizon. They offer less risk compared to equities. But they also come with lower returns, so it’s important to evaluate them according to your financial goals and risk tolerance.
– Ketaki Dandekar (Team Arthology)
Read more about Fixed Maturity Funds here – https://groww.in/p/fixed-maturity