The new fund offer (NFO) market is flooded with fixed maturity plans (FMPs) with mutual fund houses lining up over a dozen of these funds, which are closing for subscription in March 2010.

Already, 10 fixed maturity plans have been launched in January and February, while seven are awaiting the Securities and Exchange Board of India (Sebi) nod for launch.

Normally, FMPs are launched in February-March of a year so that investors can reap the benefit of double indexation. Indexation is inflation adjustment made on long-term (more than one year) capital gains. Anyone investing before the end of a financial year is able to avail of the indexation benefit of an additional year, or the double indexation benefit.

Fixed maturity plans are closed-end mutual fund schemes that invest largely in money market instruments. Many fund managers invest a small portion of their FMP portfolio in equity-linked products to boost the return of the scheme.

Rajiv Anand, managing director and chief executive officer of Axis Asset Management, said, “Typically, March is the season for FMPs of maturities of slightly greater than one year. The primary reason for this is because the investors get attractive tax adjusted returns given the benefits from double indexation,” he said.

Rakesh Rawal, head of wealth management at Anand Rathi Financial, said FMPs are good products that give better returns than fixed deposit schemes with very little risk. “There is a market for FMPs and fund houses want to service that market and hence there is a rush for launching such funds,” he added.

Over the past one year, FMPs of different tenures have given a return between 7.5 per cent and 42 per cent. At present, the bank fixed deposit rates for tenure of one year vary from 6.5 per cent to 7.5 per cent.

Anil Rego, an independent financial adviser, told Financial Chronicle that depending on his need an investor can keep 10-15 per cent of his portfolio in FMPs. “FMPs are minimal risk instruments and if one hold them till maturity, a minimum of 7.5 per cent to 8 per cent return is guaranteed,” he added.

Earlier, fund houses used to give indicative returns on FMPs, a practice banned by Sebi. The Sebi also forbade the investors from premature exit from such funds that lead to a massive redemption crisis in October 2008. Instead, the regulator made it mandatory to list all closed-end funds so that investors could have an emergency exit without actually pulling out of the scheme.