• FMPs are highly tax efficient and can prove a preferred choice over Safe Fix Deposit. So if one is looking for a Fixed and a tax efficient product FMPs are one of the best options.
• Also, as the current high interest rate scenario has translated into high returns on fixed income investments. Locking in the current high rates of interest a good idea.

Reinvestment risk :

• If interest rates have fallen by the time the investment matures, the investors will have no choice but to reinvest at a lower rate. This risk, where one is compelled to opt for a lower rate than the one he had been getting, is termed the reinvestment risk. At the current juncture, this is one of the biggest risks.

• A fixed duration product, such as a fixed deposit or a fixed maturity plan, magnifies this risk because the money is paid on maturity. However, if you invest in an open-ended debt mutual fund, you don't need to withdraw the money till you require it.

• Suppose you invest in a fund that has holdings with an average yield of 10%. If interest rates are down by 2% by July 2012, you will not only get the 10% yield, but also earn capital gains that the fund might generate at that point of time. If you continue to stay invested, you will keep earning 10%.

• While FMPs usually have maturity periods of 90, 180 and 370 days, the effective investment period for an investor is typically a little longer. Since FMPs are open for subscription only on certain dates, you may have to park your funds for four to seven days in a liquid fund while you wait for the right FMP to invest in.

• When the FMP finally matures after, say, 90 days, you realise that you don't really need the money at that point of time. So you park the proceeds in a liquid fund for some time till you find the right investment option. Thus, effectively, you are investing for a 100-110 days period. For nearly 10-20 days of this period, your money was earning less than it could have.

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