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Fixed Maturity Plans or Fixed Deposits – Which is a better investment option?

Fixed Deposit(FD) is a traditionally popular means of investing. Although it is the safest way to spend, it is common knowledge that returns obtained from a Fixed Deposit are meager when compared to other options.

While exploring other options for investment, you may have come across Fixed Maturity Plans (FMPs).

 

What is an FMP?

It is a close-ended debt mutual fund. Returns from an FMP are fully taxable. Thus, it may not be the most tax-efficient investment option in the market.

FMPs ensure promising returns that are better than those provided by FDs. Thus, you are left with a reasonable amount as returns, even after-tax deduction. Let us compare and contrast the two investment options against a set of chosen parameters before concluding which among the two is a better option.

(a) Liquidity

A fixed deposit has high liquidity compared to FMP. In the case of an FMP, there is almost no way out once you have made the deposit. You can only redeem it upon maturity. If you want to withdraw your money before the tenure ends, you will have to sell the funds through a stock exchange. However, that may be difficult as well, considering low trading volumes.

But with an FD, if you want to withdraw your money before reaching maturity period, all you have to do is pay a penalty of 1% for premature withdrawal, along with the amount you wish to withdraw.

(b) Taxation

If you are interested in investing in an FMP for the long term, be aware that the tax incidence will be lower compared to FD. This is because gains are indexed. In a fixed deposit, the interest amount earned is treated as income. It is taxed as per your respective tax slab. For the first three years (or less), the tax on FMP and FD is the same. Long term gains under FMPs are taxed at 20% after adjustments have been made for inflation.

(c) Which is more comfortable to invest in?

If you urgently want to invest, a fixed deposit would be a better option. You can open an FD on any working day. Moreover, if you choose to do it online, your FD account is just a click away. You also have different tenures to choose from.

That is not the case with an FMP. As an FMP is a closed-end mutual fund, only during a new fund offer period, an investment can be made. Also, FMPs are not flexible with tenures. Currently, only FMPs with 3year tenure are available.

(d) Which option has better returns?

For a risk-averse investor, FD is always the go-to option because FDs have fixed returns that are known to you at the time of investment. You can also make use of many online calculators to estimate the returns on your FD. FMP doesn’t come with the promise of fixed returns. To some extent, the returns can be gauged using the maturity of debt papers and credit quality. The actual returns could, however, be different.

(e) Safety of capital

A fixed deposit is for investors reluctant to take risks. A fixed deposit ensures maximum capital safety. In a fixed deposit, both principal amount and interest are secure. Although the Securities and Exchange Board of India(SEBI) has made changes to make FMP a less risky investment option, it still carries two kinds of risk – interest rate risk and credit risk. Final returns are not affected, and interest rate is taken care of if the FMP invests in debt papers whose maturity coincides with that of the FMP. However, credit risk still needs to be addressed.

Conclusion:

If you are an investor who does not want to deal with uncertainties regarding returns from an investment, then choose a fixed deposit. Otherwise, if you are okay with minimal risk and not particular about tax-benefits, an FMP would be a good investment option.

Criteria Fixed Deposit Maturity Plan(FDMP) Fixed Deposit (FD)
Returns Expected for of returns Assured Returns
Tax 1)Dividend Option

2) Tax on Capital Gains

Interest added to your income will give the total. Tax is applied on the total.
LIquidity Limited scope for Liquidity Premature Redemption, higher scope for liquidity

Who Should invest in an FMP?

The people who are ready to initiate a little risk can go for an FMP’s. The value of FMP is depended on the NAV ( Net Asset Value ). However, NAV will never remain constant. It is marked by some degree of fluctuations.

Therefore, we can conclude that FMPs are more riskier as compared to FD’s.

Also, keeping in mind the factor of restricted liquidity, investors need to make up their mind to park their funds. Provided, the investor potential to take the risk, the investor can earn secure returns.

Who should invest in a Fixed Deposit?

Fixed Deposit is considered to be a form of emergency funds. Having at least 1 fd open is considered to be a wise option. It is a form of a secure form of investment. It is well suited for risk-averse people. Moreover, one can also expect a reasonable rate of return.

Tax Redemption Policy

FMP

In the case of od FMP’S, investors are required to stay invested for a minimum period of three years. The investors must note the point they should be willing to invest in a long tenure, with no liquidity requirement. It is only then that they can avail the benefit of indexation on long term capital gain tax.

Fixed Deposits

In the case of an fd, the tax will be deducted if the interest on income exceeds RS10,000. A small amount of 10% of the fee will be deducted in such a case.

The best way to deduct the tax can be by distributing the funds. This means opening multiple fd accounts.

Both FD and FMP serve a valuable input to the investors. Investing in both of the plans at the same time can also be helpful.

Fixed Maturity Plans or Fixed Deposits – Which is a better investment option?

Fixed Deposit(FD) is a traditionally popular means of investing. Although it is the safest way to spend, it is common knowledge that returns obtained from a Fixed Deposit are meager when compared to other options.

While exploring other options for investment, you may have come across Fixed Maturity Plans (FMPs).

 

What is an FMP?

It is a close-ended debt mutual fund. Returns from an FMP are fully taxable. Thus, it may not be the most tax-efficient investment option in the market.

FMPs ensure promising returns that are better than those provided by FDs. Thus, you are left with a reasonable amount as returns, even after-tax deduction. Let us compare and contrast the two investment options against a set of chosen parameters before concluding which among the two is a better option.

(a) Liquidity

A fixed deposit has high liquidity compared to FMP. In the case of an FMP, there is almost no way out once you have made the deposit. You can only redeem it upon maturity. If you want to withdraw your money before the tenure ends, you will have to sell the funds through a stock exchange. However, that may be difficult as well, considering low trading volumes.

But with an FD, if you want to withdraw your money before reaching maturity period, all you have to do is pay a penalty of 1% for premature withdrawal, along with the amount you wish to withdraw.

(b) Taxation

If you are interested in investing in an FMP for the long term, be aware that the tax incidence will be lower compared to FD. This is because gains are indexed. In a fixed deposit, the interest amount earned is treated as income. It is taxed as per your respective tax slab. For the first three years (or less), the tax on FMP and FD is the same. Long term gains under FMPs are taxed at 20% after adjustments have been made for inflation.

(c) Which is more comfortable to invest in?

If you urgently want to invest, a fixed deposit would be a better option. You can open an FD on any working day. Moreover, if you choose to do it online, your FD account is just a click away. You also have different tenures to choose from.

That is not the case with an FMP. As an FMP is a closed-end mutual fund, only during a new fund offer period, an investment can be made. Also, FMPs are not flexible with tenures. Currently, only FMPs with 3year tenure are available.

(d) Which option has better returns?

For a risk-averse investor, FD is always the go-to option because FDs have fixed returns that are known to you at the time of investment. You can also make use of many online calculators to estimate the returns on your FD. FMP doesn’t come with the promise of fixed returns. To some extent, the returns can be gauged using the maturity of debt papers and credit quality. The actual returns could, however, be different.

(e) Safety of capital

A fixed deposit is for investors reluctant to take risks. A fixed deposit ensures maximum capital safety. In a fixed deposit, both principal amount and interest are secure. Although the Securities and Exchange Board of India(SEBI) has made changes to make FMP a less risky investment option, it still carries two kinds of risk – interest rate risk and credit risk. Final returns are not affected, and interest rate is taken care of if the FMP invests in debt papers whose maturity coincides with that of the FMP. However, credit risk still needs to be addressed.

Conclusion:

If you are an investor who does not want to deal with uncertainties regarding returns from an investment, then choose a fixed deposit. Otherwise, if you are okay with minimal risk and not particular about tax-benefits, an FMP would be a good investment option.

Criteria Fixed Deposit Maturity Plan(FDMP) Fixed Deposit (FD)
Returns Expected for of returns Assured Returns
Tax 1)Dividend Option

2) Tax on Capital Gains

Interest added to your income will give the total. Tax is applied on the total.
LIquidity Limited scope for Liquidity Premature Redemption, higher scope for liquidity

Who Should invest in an FMP?

The people who are ready to initiate a little risk can go for an FMP’s. The value of FMP is depended on the NAV ( Net Asset Value ). However, NAV will never remain constant. It is marked by some degree of fluctuations.

Therefore, we can conclude that FMPs are more riskier as compared to FD’s.

Also, keeping in mind the factor of restricted liquidity, investors need to make up their mind to park their funds. Provided, the investor potential to take the risk, the investor can earn secure returns.

Who should invest in a Fixed Deposit?

Fixed Deposit is considered to be a form of emergency funds. Having at least 1 fd open is considered to be a wise option. It is a form of a secure form of investment. It is well suited for risk-averse people. Moreover, one can also expect a reasonable rate of return.

Tax Redemption Policy

FMP

In the case of od FMP’S, investors are required to stay invested for a minimum period of three years. The investors must note the point they should be willing to invest in a long tenure, with no liquidity requirement. It is only then that they can avail the benefit of indexation on long term capital gain tax.

Fixed Deposits

In the case of an fd, the tax will be deducted if the interest on income exceeds RS10,000. A small amount of 10% of the fee will be deducted in such a case.

The best way to deduct the tax can be by distributing the funds. This means opening multiple fd accounts.

Both FD and FMP serve a valuable input to the investors. Investing in both of the plans at the same time can also be helpful.

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