Close-ended debt schemes, with equity options and a fixed time horizon. It could be 15 days, 30, 90, 141, 180 or even 365 days. Some even have a three or five-year time frame. At the end of this period, the scheme matures, just like a fixed deposit.These funds invest in a basket of debt securities that mature at the end of its horizon. For instance, a one-year FMP will invest in securities that mature at the end of a year. The funds are relatively passively managed and securities held till maturity. Investors get an idea of the likely yield on their investment at the time of entry.

Sure. If you do not like to take any risks with your savings and your diet consists of fixed return investments, this is one option to consider.

Or if you have some money that you would like to put away for a very short period of time, this is an option for you.

But read the investment objectives of the scheme carefully before you invest. A fund with a long-term horizon like a few years may have a provision to invest a small portion in equity.

FMPs are debt schemes, where the corpus is invested in fixed income securities. The tenure can be of different maturities, from one month to three years. These are close-ended and therefore, have a fixed time horizon. These funds invest in a basket of debt securities that mature at the end of its horizon. For instance, a one-year FMP will invest in securities that mature at the end of a year. The funds are relatively passively managed and securities held till maturity. Investors get an idea of the likely yield on their investment at the time of entry.

An FMP is highly secured and has high liquidity while FDs are illiquid in nature. In FMPs, tax burden is less and post-tax return high, while FDs attract normal tax rate with low post-tax return. In FMPs, indexation/dividend benefit available but not in FDs.

There are two types of risk involved: As the investment is only done in carefully selected AAA and AA rated debt securities, the risk is very low and diversified. It arises due to selling of the debt securities before its maturity period. In the FMP, the investment in the debt security is done for the same period as the maturity of the FMP. Holding the underlying instrument up to their maturity effectively mitigates the interest rate risk.

In case of FMPs, one cannot look at the portfolio of any fund before investing since they are either close-end funds or interval funds, which are rolled over at a defined period. Investors have so far been able to derive tax efficient predictable returns from FMPs.

However, in view of interest rate rise, tighter liquidity situation and deteriorating condition of companies in the real estate sector, a part of an FMP portfolio of some funds can face default. This can lead to lower-than-indicative yield stated by the fund, no return or the possibility of a capital loss. Ideally, FMPs invest in high quality instruments, which have been rated by at least one credit rating agency. In case of investment in unrated papers, prior approval of the board of directors of the AMC or the Trustee has to be obtained. But to enhance the overall yield FMPs may assume high credit risk and run the risk of default. There are two thing investors can do to guard against such failures: keep away from FMPs indicating very high yield. Abstain from FMPs of a fund family with dominance of low rated papers in their existing FMPs.

Request for an indicative portfolio and look out for debt instruments with less than AAA (or equivalent) rating. FMPs are ideal for investors who want to generate a competitive return at lower risk. So if the fund manager is taking on credit risk (by investing in lower rated paper), the investment proposition of an FMP loses its appeal and conservative investors must re-consider investing in it. Treat the yield as strictly indicative. Given how debt markets work, there is always a chance that the FMP may deviate marginally from its indicative return. As an investor, factor in the variation. Investors must be sure that they intend to stay invested in the FMP until maturity. Only then can they afford to be indifferent to the intermittent volatility in its NAV.