Fixed Maturity Plans (FMP) vs Fixed Deposits (FD): Make a smarter choice!


Bank fixed deposits and Fixed Maturity Plans are similar investment avenues. Learn the differences between FD and FMP, and find out whether fixed deposits or closed ended debt Fixed Maturity Plans will give you better returns.

In a volatile market, it might be a smart idea to lock in some capital in fixed investment instruments. There are two popular fixed investment avenues, mutual funds Fixed Maturity Plans (FMP) and bank Fixed Deposits (FD). Which one is better in terms of returns and risks? If you invest in both, how much should you invest in Fixed Deposits and fixed maturity debt funds respectively? What are the basic differences between FD and FMP? What are the investment procedures? What are the tax benefits of FDs and FMPs, or in other words, which one gives you more tax benefit? We will answer these questions here with proper explanations, compare the merits and demerits of FD and FMP, and try to figure out that between Fixed Deposits or Fixed Maturity Plans which one gives better returns to different investors in different investment scenarios. Keep reading!

Should I invest in both FDs and FMPs?


This rather depends on your personal choice. Both Fixed Deposits and Fixed Maturity Plans belong to debt asset class, ideally they should not exceed your limit of debt investments in your portfolio. In other words, if you decide that your portfolio should have 50% debt investments, you can split it between FD and FMP, but together it should stick to that 50% limit. The ideal equity debt ratio for an investor should depend upon various factors like age, risk taking capabilities, number of dependents, income, general market scenario and so on. So only you can decide how much you should invest in debts.

Many people will tell you that FMP is better than FD. I am strongly against any such overt generalization and can at best say that both FMP and FD have their merits and demerits. I won't also advise you stop investing in bank Fixed Deposits. FDs are good for stability and security of your capital, but beyond a certain limit you should look out for a little risky but returning capital appreciation in FMPs. Let us now try to figure out whether FMP gives better returns that FD and why.

When FD is better than FMP


These days, the pre-tax return from FMP and FD have been almost at par, varying between 9 to 9.5% usually. If you do not come under taxation, or fall in the 10% tax bracket, definitely Fixed Deposits are better than Fixed Maturity Plans because they are more secure. Any mutual fund investment is subject to some amount of risk, and FMPs are no exceptions. FDs in nationalized banks are insured up to Rs. 1 lac. Beyond that, technically there is risk, but practically speaking, the risk potential of investing in nationalized banks is next to nil unless something really unimaginable takes place.

When FMP is better than FD


If you fall in the 20 or 30% tax bracket, FMP is better than FD. This is because the post tax returns of Fixed Maturity Plans are more than Fixed Deposit yields. We all know that Fixed Deposit investments are generally taxable incomes and that takes a sizeable portion of the pie for 30% tax payers. What is the tax scenario in FMPs?

FMP Dividends are Tax Free: If you opt for Dividend plans in FMPs, then the dividends are tax free (in your hand). However, please note that the Mutual Funds houses do pay the dividend distribution tax of 12.5% along with due surcharge and CESS, and they are not paying it from their own pockets. The tax is deducted from your returns indirectly. Nevertheless, for people falling into 20-30% tax brackets, this is still a better option.

Long Term Capital Gains: If you opt for Growth plans, your net return will come under Capital Gains. If you stay invested for longer terms (more than 1 year), the long term capital gains are taxed at 10% without indexation or 20% with indexation. This is not applicable to Fixed Deposits and makes FMP a better option for high tax payers than FD. The double indexation makes Fixed Maturity Plans even more tax friendly.

Disadvantages of Fixed Maturity Plans as compared to Fixed Deposits


While tax benefits count among the advantages of Fixed Maturity Plans over Fixed Deposits, there are some statutory warnings as well. FMP is basically a mutual fund and is subject to some amount of risk (though nominal) which may negatively impact your returns. Also, once you lock your investments in bank deposits you get the same interest rates no matter whether the market is bullish or bearish. If the market goes down and you stay invested in long term fixed deposits, you benefit from the contracted higher interest rates. Fixed Maturity Plans, on the other hand, are market linked. If the market declines their interest rates and potential returns decline as well. Also, FMPs are not as liquid as bank FDs because you can only transact them in exchanges. Exiting bank deposits are far easier.

Write to us where are you going to invest, and what do you think about our comparison of FMP and FD. We would love your comments below!

Read Best Investment plans for senior citizens/ retired people after retirement


Comments

Guest Author: Wilson Dsouza27 Jun 2014

What is the difference between single indexation, double indexation & no indexation in regards to FMPs? how do I benefit from these in regards to tax and profits? How long should I stay invested? appreciate if you would give me clear cut simple examples.



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