Should You Be Choosing FMPs Over FDs?

  Author: Kundan Kishore

Fixed deposits are a great favourite among Indians. More than half the financial savings of Indians are typically invested in fixed deposits (FDs).  At the same time, it is worth looking for alternatives to FDs.

Fixed Maturity Plans (FMP) from mutual funds can be a great alternative to fixed deposits (FDs). FMPs are closed-ended debt fund schemes that mature at a predetermined date, of say, in one year, three years, and five years. These funds remain invested in debt investments till maturity. They typically invest your money in government securities, corporate debt and, money market investments. This helps FMPs in their aim of generating steady returns over a period of time.

FMPs provide two advantages that help them compete with FDs. In the process, they become credible alternatives as short term investments.

Fairly stable returns Since they hold on to their investments till maturity, returns from FMPs are fairly stable. You can get a fair idea of what you can expect at the end of the tenure. In the eyes of the investor, this can make them comparable with fixed deposits.

Tax edge If you remain invested in an FMP for 36 months, your capital gains get taxed at 20 per cent with indexation benefits. This means that the capital gains from your FMP benefit from the upward adjustment of the price of units acquired due to adjustment for inflation. This effectively reduces the capital gains from FMP. The capital gains tax rate of 20 per cent is also much lower than the tax a person in the 30 per cent tax slab will pay.

To sum up, for needs that are about 3-4 years away, you can consider FMPs as credible low risk investment alternative to FDs, especially if you are in the highest tax bracket.