FMPs V/S Fixed Deposits – Which One Is Better?

Fixed Deposit is one of the safest forms of investment. A FD investment offers a higher interest rate as compared to other investment options. However, more than the returns, it is the security which is the most sought after feature of fixed deposit. When deciding upon a fixed deposit investment, three components are to be considered – the amount that is being invested, the period for which it is being invested and the rate of interest that is being charged on the same. Higher the rate of interest, better will be the returns on its maturity.

In recent times, one of the other investment options which have grown pretty popular is the fixed maturity plan. Fixed Maturity Plans are nothing but a fixed deposit of the mutual funds’ industry. In recent times, Fixed Maturity plans have strengthened their place in debt fund investors’ portfolio. Most of the investors keep switching between FDs to FMPs. What are the reasons behind this?

Return on Investment: Returns are what matters the most. It is quite a sensitive subject. Fixed income investors take a plunge in FDs and FMPs because they are looking for sizeable income at the end of the tenure. However, over here, FMPs are quite dissimilar to FDs, and thus, they have a huge difference between them. FDs offer assured returns on maturity, and the same is indicated to the investor at the time of investment. However, similar cannot be said of FMP. They are indicative. The investment made in FMP offers an indicative yield. Thus, under this scenario, the projected returns can deviate. However, the deviation would not be significant. This makes FDs a much safer bet as compared to FMPs.

Taxation: There is a considerable difference between the taxation of Fixed Deposit and Fixed Maturity Plans. An investment in FD sees the interest income is added to the investor’s’ income and is taxable as per the current slab viz., known as the marginal rate of tax. As for the Fixed Maturity Plans, the tax variable is dependent upon the investment type. Whether you have applied for dividend or growth?

If you opt for the dividend option, then the investors will have to bear the DDT (Dividend Distribution Tax).
If you opt for the growth option, the returns on investment are treated as capital gains based on the tenure of investment (long-term or short-term).

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  • Short-Term: If the capital gains are short-term viz., an investment held for a period less than one year, the income that you earn from interest is taxed at marginal rate.
  • Long-Term: If the capital gains are long term ones, the tax liability calculated based on the indexation is 20%, whereas, without indexation, it is 10%. (Plus surcharge)

Tenure: As for the investment tenure, both FDs and FMPs offer flexibility. FDs offer a tenure of 1-5 years, and so does FMPs. FDs offered by Non-Banking Financial Companies (NBFCs) are much more flexible as compared to that of banks. Over here, investors are expected to select the investment based on their needs and requirements.  

Liquidity: FDs offer better liquidity as compared to FMPs. If fixed income is taken into account, both are restrictive, and liquidity does not exist. However, FDs can be withdrawn without incurring a penalty, but same cannot be said for Fixed Maturity Plans. Apart from that, FDs offer various options such as balance transfer and flexi deposit services which offer a higher liquidity.

Thus, we can conclude that both these investment avenues offer a higher interest returns and are a good bet. However, FD investment is slightly better than fixed maturity plan as per the points above.

 

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