Fixed Maturity Plans (FMP) or FDs: Which is a Better Investment?

There is a plethora of investment options available in the market, each designed to suit different needs. If you wish to invest in low-risk options and yet earn attractive returns, you may consider Fixed Maturity Plans and fixed deposits. Both these investment plans have different purposes, exposure to risk, and return structures.

Here is a distinction between FMPs and FDs to help you choose the right one and make informed investment decisions.

Meaning

A Fixed Maturity Plan (FMP) is a type of close-ended debt-based mutual fund that matures over a fixed tenor. The funds you invest in FMPs are thereby invested in fixed interest securities like bonds, commercial paper, treasury bills, and government securities having the same maturity as the FMP. Thus, FMP returns depend on the interest rates prevailing in the market. Fixed Deposit, on the other hand, are standalone non-market-linked schemes that also have a lock-in period but offer fixed interest earnings with stable interest rates over the investment tenor. In other words, FDs will earn on a fixed interest rate basis the tenor you choose but FMPs will earn basis varying interest rates over a fixed tenor.

Subscription

FMPs are closed-ended debt funds, so you can only subscribe to them during a particular period at the time of its launch. On the other hand, there is no such restriction in the case of FDs. You can start investing in FDs anytime, based on your convenience.

Risk

Funds from your FMP are played across the market in debt instruments. So, they are directly linked to the market. Thus, your investments are exposed to a certain amount of risk of the underlying instruments. In addition to this, FMPs also carry reinvestment risk. On the contrary, FDs are not linked to the market and your investment in FDs is parked miles away from the market. To sum up, FDs are risk-free investment options.

Returns

Since FMPs enjoy market exposure, they offer higher returns. Also, the fund house is likely to have an idea of the market trends and historic interest earnings for the instrument you choose, so they can indicate the returns possible on your investment. However, they will never be able to guarantee it. Fixed deposits, on the other hand, offer guaranteed returns, which you can calculate using an Online FD Interest Calculator beforehand. So, if the issuer promises 8% interest returns for your investment, you will receive the same at maturity without any fluctuations or depreciation.

Liquidity

FMPs have a pre-determined tenor during which you are not allowed to make any withdrawals. If you withdraw the funds before the tenor, you may lose indexation benefits. On the other hand, you can make premature withdrawals from your fixed deposit. Here in case of a premature withdrawal, you will have to forego the interest your investment has earned and paid a premature withdrawal penalty too.

Taxation

FMPs are subject to capital gains if held for more than 3 years and thus, returns are taxed at 20% after indexation. However, the indexation benefit reduces the capital gains and hence, you can save tax and enjoy better post-tax returns.

In the case of FDs, the interest income is added to your other income and is taxed as per your income tax slab rates. To start off, banks and post offices deduct TDS on FD interest income if it exceeds Rs.10,000 in a financial year. The limit is now proposed to be increased to Rs.40,000 for regular investors and to Rs.50,000 for senior citizens. In the case of company deposits, the TDS exemption limit is Rs.5,000 for all type of investors. The TDS rate is 10% if you have submitted your PAN details and 20% if not. However, you are liable to pay the rest of the tax as per the income tax slab rate applicable to you.

With an idea of how FMPs and FDs differ, you are now set to invest in one or both of them based on your investment purpose and risk capacity. Invest in Bajaj Finance Fixed Deposits to enjoy safety and high-interest earnings. These highly safe FAAA-rated FDs offer high fixed deposit rates. For instance, a 36-month FD with returns at maturity offers up to 8.75% interest rate for regular investors. Senior citizens on this same FD can earn FD rates as high as 9.10%. Use the FD calculator to plan your investments in advance. This way, you can align all your investments to achieve various goals like kid’s education, home loan repayment, and more.

Aman Khanna is an experienced financial advisor. He has written numerous pieces on various investment topics like Mutual Funds, FD, RD and many more.