{"id":2231,"date":"2012-05-05T15:32:40","date_gmt":"2012-05-05T15:32:40","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=2231"},"modified":"2012-05-05T15:32:40","modified_gmt":"2012-05-05T15:32:40","slug":"fmp-vs-fixed-deposit-where-to-invest","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/fmp-vs-fixed-deposit-where-to-invest\/","title":{"rendered":"FMP VS Fixed Deposit – Where to Invest?"},"content":{"rendered":"
Fixed maturity plans (FMP)<\/strong> are closed ended debt mutual funds which are very similar to fixed deposit by banks<\/strong>. These are of varying tenures like three months, six months, one and two years and rarely for three years. These schemes portfolio consists of debt securities such as Government Securities,\u00a0certificate of deposit and commercial papers of nearly the same maturity as the scheme.<\/p>\n FMPs are close ended schemes. So you can only invest directly when they are open for subscription during New Fund Offer (NFO). After that you cannot enter or exit the scheme directly from Mutual Fund house. The only exit option is through stock exchanges where they get listed as mandated by SEBI. However liquidity of these FMPs is concern for exit.<\/p>\n Until 2009 Mututal funds used to publish an indicative returns for each of their FMPs. But SEBI has banned the same now. The current FMPs are however able to offer returns comparable to corresponding fixed deposits from banks. These days the return for 1 year FMP is in the range of 9% \u2013 9.5%.<\/p>\n The other thing to note is the returns of FMP are not as secured as Fixed deposits. So the question is why should one even consider FMPs when they give similar returns to FD at a higer risk? The answer is Tax treatment of FMPs as explained in the next section.<\/p>\n In case of Fixed deposits the interest gained is added to the income and is taxed at marginal rate of taxation. This reduces the post tax return of Fixed deposits by 30% for people in highest tax bracket. In case of FMPs following is the tax treatment:<\/strong><\/p>\n Dividend:<\/strong> The dividends of FMPs are tax free in the hands of investors. But Mutual Funds companies have to pay a dividend distribution tax of 12.5% (plus surcharge & cess) before distributing it to investors. Thus the investor pays tax indirectly. This is still lower than FDs for investors with higher personal tax rates of 20% and 30%.<\/p>\n Capital Gains:<\/strong> If an investor opts for \u201cGrowth\u201d option the returns are taxed as Capital gain tax. Short term gains are taxed as per the tax slab while long term gains are taxed at 10% without indexation or 20% with indexation. The indexation benefit inflates the cost of purchase lowering long term gains tax liability. This fare far better than FDs where no such benefit is available.<\/p>\n Double Indexation:<\/strong> What makes these FMPs more tax efficient is double indexation. Usually FMPs have maturity period which is slightly more than 1 year like 375 days. This has the advantage that the FMP return is able to avail double indexation benefit as it covers two accounting period. However this advantage may go whenever Direct Tax Code (DTC)<\/strong> is implemented.<\/p>\n Below is the table comparing returns between bank Fixed deposit and FMPs.<\/p>\n <\/a><\/p>\n As you can see in the above chart FMP turns out to be much more efficient investment than Bank FD for higher tax bracket<\/strong>.<\/p>\n Below is a comparison table showing which is more tax efficient – dividend or growth option?<\/p>\nHow to invest in FMPs?<\/h2>\n
Returns from FMP:<\/h2>\n
Tax Advantage for FMP:<\/h2>\n
FMPs Vs Fixed Deposits:<\/h2>\n