When it comes to the safety of capital and getting stable returns, fixed deposits are the first choice of people. However, over time, fixed maturity plans (FMPs) have emerged as the best alternative to conventional fixed deposit schemes.
What Are FMPs?
Unlike fixed deposits, which are offered by banks, FMPs are close-ended debt mutual funds having fixed maturity provided by mutual fund houses. FMPs invest in debt securities like money market securities, corporate bonds, commercial papers, and certificate of deposits of maturity similar to the duration of the scheme.
For example, if an FMP’s duration is five years, it will invest in a corporate bond having a maturity term of five years or fewer.
An investor can invest in FMP only at the time of new fund offering (NFO) and cannot withdraw from the investment before maturity. However, he/she can sell it in the stock exchange where it is listed according to SEBI guidelines.
Difference Between FMPs and FDs
Being a debt fund and considered to be the next best alternative of fixed deposits, FMPs differ a lot from fixed deposits.
While returns from fixed deposits are guaranteed, that’s not the case with FMPs. The returns showed during NFO are indicative in nature and are nowhere close to actual returns. The returns are affected by interest rate movements and credit ratings, which makes it a little riskier.
However, in fixed deposits, you can lock in funds at best FD rates in India, helping you earn higher yields on the deposits made.
In fixed deposits, you have the flexibility to choose the tenure of the deposit ranging from 7 days to 10 years as per your requirements. Further, using an FD calculator, you can know your monthly interest payout from the fixed deposit. On the other hand, in FMPs, you don’t have such kind of flexibility, and it comes with a fixed tenure.
FMPs have the edge over fixed deposits in terms of taxation. The returns from FMPs which are longer than three years are taxed at 20% with the benefit of indexation. The interest earned on fixed deposits are added to your total taxable income and taxed according to your tax bracket you fall under. Further, the indexation benefit is also not applied to fixed deposit returns. Indexation is a process to make your returns inflation-adjusted, which results in less tax instance.
Unlike fixed deposits, which carries zero risks, FMPs carry credit risk. If the credit rating of an underlying debt instrument in the portfolio is downgraded, the FMP returns are negatively impacted.
The FMPs are listed on stock exchanges that allow investors to sell it midway, but the liquidity in such instruments are low, which makes it difficult to sell them. As such, banks offer a premature withdrawal facility on fixed deposits which makes it a highly liquid instrument.
Going through all the differences, one can easily figure out which one will make a better investment.
Fixed deposits definitely score over FMPs in returns, risk, tenure, and liquidity, all primary factors that investors primarily look for before investing. It is an ideal investment option for senior citizens and conservative investors especially when they choose the best FD rates in India. On the other hand, FMPs are ideal for those who are comfortable with risk and want to earn a higher interest rate than FDs.