When it comes to investment, most people in India have a conservative approach and prefer investing in low-risk instruments like the bank fixe deposits. However, with the inflation rate rising every year, the FD returns barely provide valuable returns post tax adjustment. As such, as a smart investor, it is vital that you explore other investment options beyond the bank FDs that delivers betters returns. One such instrument that you can consider having in your portfolio is the fixed maturity plan or (FMP).
If you are an amateur investor, and have not idea about choosing the right investment option, let us compare FDs and fixed maturity plans. This will help you make the right decision.
- Investment safety
As an investor, one of the most important things that people consider while choosing the instrument is the capital safety. And, in this regard, the fixed deposits hold an edge over FMPs. Both the principal and the interest amount is completely safe and you get assured returns at fixed interest rate on maturity.
The fixed maturity plans, on the other hand, are modified by the SEBI (Securities Exchange Board of India) to make them safer for the investors but they carry credit risk and interest rate risk.
Fixed deposit schemes offer high liquidity. You can easily withdraw the money from your FD before the end of the term by paying the premature redemption fees, which is usually about 1% to 2% of the amount.
The fixed maturity plans do not give investors the option to redeem before the maturity period. The only way to exit the investment before maturity is to sell the fund on stock exchange. But, you must know that selling the funds on the exchange can be challenging as the trading volume of such funds are extremely low.
- Returns on investment
One of primary objectives of any investor is to earn decent returns. And, this is where the FMPs are a better choice than FDs. In bank fixed deposit schemes, the interest rate is fixed at the time of deposit and the interest rate remains the same throughout the tenure. Thus, you would know exactly the returns you will get on maturity.
In case of fixed maturity plans, the returns are not fixed. But, historically, the FMPs have offered higher returns than FDs; it usually ranges between 11% to 12%. You can gauge the returns based on the credit quality and maturity of the debt papers that the funds invest in. However, you must know that the actual returns you get may be different from the indicative returns.
- Tax implication
In case of fixed deposit schemes, the interest you earn from your investment is added to your income under the income from other sources cap and it is taxed as per your tax slab.
If you are invested in short-term FMPs with maturity less than three years, these funds are taxed as per your tax slab. But, if you invest in long-term FMPs, i.e., plans with maturity term of more than three years, the returns earned are taxed at 20% after adjusting for inflation.
FMPs or FDs – Where to Invest?
From the above comparison, it is evident that the fixed deposit schemes are highly beneficial for low-risk investors who don’t like any element of surprise. The FMPs are a suitable investment choice for those are willing to take risk and are looking to get higher returns than FDs. So, assess your investment needs and choose the right investment instrument accordingly.