Are Fixed Maturity Plans (FMPs) a risky investment in today’s market?

October 24, 2008 by  

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FMPs are risky investments?

Are Fixed Maturity Plans (FMPs) risky in today’s market?

Are Fixed Maturity Plans safe from the onslaught of the credit crunch disaster that has lead to turmoil in world markets?

In an environment where every financial investment vehicle, be it individual shares in companies, mutual funds,corporate debt and even bank deposits is now being questioned as a risky investment, can fixed maturity plans be far behind?

Fixed Maturity Plans (FMPs) have seen some redemptions by corporates in the recent past

Fixed Maturity Plans have recently seen some heavy redemptions by companies, despite the 1-2% penalty for redemption prior to the maturity date.

There are two reasons for this early redemption of FMPs by corporates

  • The first reason for early Fixed Maturity plan redemption is the liquidity situation that some corporates are facing leading to defaults in corporate debt. As a result, some companies,especially in the real estate sector, are redeeming FMPs much prior to the maturity date and incurring some penalties due to early withdrawl
  • The other reason for Fixed Maturity Plan redemption is largely panic! At a time, when some people are wary of even investments in public sector banks, can they trust FMPs? Some people are of the view today that the only safe investment is cash!

So, are Fixed Maturity Plans safe in this current scenario?

My personal opinion is that FMPs are reasonably safe as long as you invest in a good fund ,managed by professional managers. You may do well to check the offer document to ensure that the fixed maturity plans invest in largely Government securities and AAA corporate debt

In summary, investing in FMPs may not give the same high post tax returns as in the past due to the falling interest rates and credit crunch, but fixed maturity plans are still an important investment vehicle to consider in the current market scenario

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