Fixed-maturity plans

Suresh Krishnamurthy

INNOVATIVE income options, such as the serial plans from Kotak Mahindra Mutual Fund, are finding greater acceptance among the asset management companies, with many funds starting to offer several options that can be classified under the broad definition of fixed maturity plans.

At the outset, the greater choice for investors is indeed welcome.

For high-net-worth investors in particular, fixed maturity plans have intuitive appeal. Faced with a barrage of questions on the maturity period of a mutual fund income scheme and the expected return, mutual fund brokers have, for many years now, found it difficult to put across the concept of mutual funds to a prospective investor.

Fixed maturity plans could help bridge this knowledge gap. Also, fixed-maturity mutual fund income schemes are now more tax-efficient than fixed deposits and bonds. On redemption after holding for at least a year, investors can use the benefit of indexation for capital gains that has been denied to fixed deposits and bonds.

However, any overkill has its own set of disadvantages. Fixed-maturity plans are, to an extent, a negation of the concept of investing in mutual funds. Investors entrust their funds to knowledgeable fund managers who, by fine-tuning the maturity-wise allocation of their portfolios, attempt to increase the return for the units of risk undertaken by the fund or attempt to reduce the units of risk for the returns generated by the fund. This protection is not available in a fixed-maturity plan.

In the end, investors should not lose sight of the principle of diversification. Fixed-maturity investment options have their own advantages and so do floating maturity schemes, which most mutual funds are. Events in 2000 clearly highlighted the need for a properly diversified portfolio which has exposures to both these classes of options in adequate proportion. What exactly this adequate proportion is would depend on investors' liquidity needs and risk preferences.