Fixed Deposit Vs Fixed Maturity Plan

Bank fixed deposit are massively popular and are the preferred investment option of millions. But if you have already build a corpus by investing in FDs and are looking for other safe investment avenues with better yield then you may try your luck in Fixed maturity schemes. But what are fixed maturity plans? How are they better than FDs? Let’s try and understand.

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What is an FMP?

Fixed maturity plans are a form of alternative investment than the conventional FD investment. These are close-ended mutual fund scheme that allows you to invest for a fixed tenure and generate better returns compared to a fixed deposit. The money pooled from investors is invested in fixed income securities that mature before the scheme matures. If you are an investor looking for less risky investment option then FMPs are the best investment tools for you as it gives you an attractive yield along with safety. It comes with other benefits as well. For example, if you want to exit the scheme before its maturity, you can easily sell your scheme in the stock exchange.

See Also: Benefits of Fixed Deposit in India

How an FMP is Better Than Fixed Deposit (FD)?

There are basic similarities between fixed maturity plans and an FD. But the two investments instruments also have some differences.

Both FDs and FMPs are instruments that offer safe returns and provide capital protection to investors. You must stay invested for a fixed tenure in case you are investing in any of these instruments. Both the instruments offer you the flexibility to choose the investment period based on your convenience.

But the returns on FMP are much higher when compared to Bank FDs. The FMPs gives indicative returns as opposed to the guaranteed returns promised by the fixed deposit. So the returns you get by investing in an FMP are indicative and not assured, unlike FD.

Additionally, the value of your FMP is reflected by the NAV of the fund. You can know the NAV of your investment daily. This makes these instruments riskier than FDs. The fluctuating interest rate affects the NAV of fixed maturity plans thus making it a little riskier than bank FDs.

How are FMPs Different from a Debt Fund?

The fund managers apply a buy and hold strategy for managing fixed maturity plans. Since these are closed-ended funds they invest in instruments that match the tenure of the FMP in terms of asset maturity. Fixed maturity plans do not involve the buying and selling of debt securities like debt funds. This strategy allows the expense ratio to below as compared to the debt funds.

See Also: How To Choose the Best FD?

What are the Benefits of an FMP?

• Fixed maturity plans offer capital protection and bear a lesser risk. As such these plans can be compared to debt instruments in terms of the safety and security they offer. This is a good investment option for investors looking for stable returns along with capital protection. FMPs. Invest in government bonds, AAA-rated debt fund and highly rated instruments. These instruments are less volatile than equities and are known to carry a lesser risk of default. 
• A crucial advantage the investor gets by investing in an FMP is the risk of interest rate gets shielded. When you invest in an open-ended debt fund then the rise in interest rate will result in depreciation in the value of debt securities. This causes the NAV to become low. Since FMPs are close-ended they do not carry the risk if interest rates rise as they are locked to provide fixed returns.
• The fixed maturity plans are more tax-efficient when compared to bank FDs. The interest income of the fixed deposit is added to the interest income of the investor and is taxed as per the applicable tax bracket. For FMPs the taxation depends on the maturity period as these are debt funds. FMPs that have a maturity over three years have lesser tax implication when compared to a fixed deposit with the same maturity.
• The tenure of investment for FMPs matters a lot in terms of taxation. If the FMP has tenure of over 3 years will be taxed as per the peak rate. But if the FMP is held for more than 3 years then it converts into long term capital gains that will be taxed at just 20% with the benefit indexation.

See Also: Best Fixed Deposits in India (2019)

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