Which option is better? FDs or FMPs?

Fixed deposits for a long time have been considered the safest investment method. People having the tendency to prefer FD over any other form of investments, mainly, due to its reliability. However, Fixed Maturity Plans (FMPs) in recent times has emerged as an alternative to fixed deposits. Fixed Maturity Plans are a category belonging to pure accrual debt funds.

According to ‘pure accrual debt funds’, once the portfolio is constructed on your behalf after purchasing the bonds, you cannot choose to liquidate them until the maturity. It is important to know that Fixed Maturity Plans are ‘close-ended’ in nature. Moreover, the new fund order period lasts for only up to a week within which one has to subscribe to their units.

A fall in home loan rates has brought about a fall in deposit rates as well. Thus, the investors now earn only up to 6-8% per annum on their savings with fixed deposits. If you are one of the investors who is looking forward to investing in low-risk avenues then you can consider any of these options. There are several factors, though, which you need to consider. These include:

Liquidity: When referring to liquidity, FDs are better than fixed maturity plans. While you cannot en-cash your FMP as there is no option available to do so. FDs offer easy and quick withdrawals. An individual can use net banking and other ways to get it done. However, investors are well aware of the fact that premature withdrawal will lead to sacrificing on returns.

Returns: Fixed deposits are well known for their returns which are the safest. The biggest difference between FDs and FMPs is that the returns are not guaranteed by the financial institutions in terms of FMPs. Back in the days, FMPs used to help by providing ‘indicative yield’, however, SEBI brought an end to the practice as it was leading to mis-spelling as the distributors proclaimed it as a guaranteed return.  

However, Fixed Maturity Plans do provide an indicative portfolio breakup between bonds. This helps investors to derive the expected return indirectly. Another plus point of FMPs is that they provide 75-100 bps higher returns when compared to FDs.

Risk: When we talk about risks, it is essential to know that the risk in FMPs is more than that of FDs. Under FMPs, an investor is exposed to the risk regarding their underlying papers getting defaulted which in turn affects their returns. Apart from this, there is a reinvestment risk associated with the FMPs. Re-investment risks ask an investor to reinvest after the maturity for a lower interest rate. However, with all its risks, FMPs can be managed well and chances of default are very less.

 

Efficiency on Tax: With regards to tax efficiency, FMPs are far better than fixed deposits. But that is only when tenure exceeds the period of three years. Since, if the tenure is less than 3 years, FMPs will be taxed similarly to that of FDs. However, for a period of more than 3 years, FMPs are indexed for inflation, and thus, bring down the tax outgo as they are taxed at 20%.

One can, therefore, understand that there are several pros and cons in either form of the investment. It just depends on which one suits your mentality the most. Some people will stick to fixed deposits, and rightly, because there is security while others would opt for FMPs in order to save tax. This is just one example.

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