Fixed Maturity Plan vs. Fixed Deposits

Fixed Maturity Plan, Fixed Deposits

Confused between Fixed Maturity Plan and Fixed Deposit and wondering which the best investment option is? Then this article is for you.

What is Fixed Maturity Plan (FMP)?

Fixed Maturity plan or FMP is a mutual fund wherein investors can invest a fixed amount of money for a defined period to earn returns. At the end of maturity, you get the money and the interest. The returns stated by the company are generally an indicative.

As the corpus invested in Fixed Maturity plan is invested in debt securities, the actual return often varies slightly depending on the market movement.

Also, there are chances that a company might have invested in debt instruments with low ratings due to which there has been a default in payment of interest. This can affect the final returns.

What is a Fixed Deposit?

Fixed deposit or FD is a savings account or Certificate of Deposit that pays a fixed rate of interest until the maturity date. Once the fixed deposit is made, funds cannot be withdrawn. If withdrawn prior to the maturity date, then investor needs to pay a penalty. FDs can be used by individuals or corporates.

Similarities

  • Tenure can be from one month to 5 years.
  • Fixed Maturity Plan and FD are invested in debt securities and hence, do not have Equity component.

Differences between Fixed Maturity Plan and Fixed Deposits

Sr No Fixed Maturity Plans Fixed Deposit
1 Issued and Managed by Mutual Fund companies Managed by banks
2 These are deposits in bank debt instruments These are invested in Government backed securities or corporate fixed deposits.
3 Returns are indicative Return or interest received is fixed
4 These are closed ended funds which means one can only invest during a New Fund Offer. One can open a bank fixed deposit anytime during the year.
4 The returns attract only dividend distribution for dividend option or capital gains tax for growth option. The returns are fully taxable at the maximum tax %.
5 Indexation benefit is allowed for long tenured FMPs in taxation. No indexation benefit


To put things in perspective, let’s take a look at the following example to see a comparative analysis of the returns earned on a Fixed Maturity Plan and FD- Let us assume that Nisha invests Rs. 1 lakh for 13 months at an interest rate of 9.25%. The interest earned after 13 months is Rs. 9243.67.

The following is a pictorial representation of the case study-

Fixed Maturity Plan 1

For ease of comparison, lets us assume that both, the FMP and the FD give 9.25% returns, though on a factual basis the returns would be higher in FMPs.

In the following section, post tax returns have been calculated for FDs and FMPs. In case of Fixed Maturity Plan, I have looked at returns with and without indexation.

For ease of comparison, lets us assume that both, the FMP and the FD give 9.25% returns, though on a factual basis the returns would be higher in FMPs.

1. Returns with Fixed Deposit

FMP2

Thus, although the rate of return is 9.25%, the post-tax rate of return works out to be 8.9%.

2. Returns with Fixed Maturity Plan (FMP)

Benefits of Indexation cannot be overlooked when looking at Fixed Maturity Plan. Indexation allows the tax payer to factor in the influence of inflation on the cost. The factor is called Cost Inflation Index (CII) and is notified by the Central Government every year. Thus, lower amount of capital gains are taxed owing to this.

To arrive at the post tax returns, we look at 2 methods one using indexation and one without-

FMP3-001

In the above example, an indexed loss is incurred and hence, the post-tax return remains intact. While using the indexation method for calculating capital gains, the longer the term of the Fixed Maturity Plan, the higher is the benefit from indexation, thus resulting in better post tax returns.

Conclusion

From the above comparative analysis, we can state that the returns earned from a Fixed Maturity Plan with or without indexation are higher than the returns earned from Fixed Deposit.

This is new age of finance. In this competitive world, each company wants to do better than the other. And this is resulting in emerging financial solutions day after day. It is up to us to take the benefit and see how it will fit in our financial goals. Like I always say, what are you waiting for!!!!!

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About the Author

Dimple has 8 years of working experience in Research, Capital markets and Mutual Funds industry. Having worked as an Internal auditor, she has knowledge of Quality Management Standards and ISO 9000. Music and dance is close to heart.

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