Which One is Better For Investors? FMP Or Bank Fixed Deposit

We all know what is bank fixed deposit. In this article I will present an introduction to FMP or Fixed Income Plan, comparison between FMP and Bank Fixed Deposit and when an investor should invest in FMP.

What is FMP or Fixed Income Plans ?

FMPs are closed ended mutual fund scheme with a maturity period ranging from a few days to five years. Most of the FMP plans are debt oriented. But a few scheme may have a small equity component. At the end of the period, the scheme matures, just like a fixed deposit in a bank. FMP schemes have two options. With growth option or with dividend options.

Do FMP provides a guaranteed return?

No, they do not. But investors are informed an indicative return at the maturity. If you select a FMP, which invest only in debt instruments, more often than not, the actual return will match with indicative return.

What is the difference between FMP and Bank FD?

Practically, for an investor, there is no difference. Only difference is that bank FD gives an explicit guarantee on return, where as in FMP, return is indicative. In terms of tax friendliness, FMP are more tax friendly than Bank FD ( see the table below ).

FMPBank FDInvested Amount Rs 100 Rs 100 Return % ( Assumption ) 10% 10% Investment Tenure 1 year 1 year Interest Earned Rs 10 Rs 10 Tax on Interest Earned Rs 1.416 (@14.16%) Rs 3.4 (@34%) Net Interest Earned Rs 8.584 Rs6.6

*12.5% Dividend Distribution Tax + 10% Surcharge + 3% Cess = 14.16% **30% Tax ( for income over 10 lakhs ) + 10% Surcharge + 3% Cess = 34%

Dividend Options or Growth Option - Which one I should go for?

It depends upon the tenure of your investment. For less than one year investment, dividend option is better. For a less than one year maturity period, you pay 14.16% tax, deducted at the time of distribution of dividend. For more than one year, growth option is beneficial. In case of more than one year, you need to pay 10% as capital gain tax (without indexation) or 20% tax (with indexation). You can also avail the benefit of double indexation by investing in march of a financial year and redeeming the units in April in next financial year ( say - purchase in March'09 and redemption in April'10 ). In case of double indexing, tax liability is further reduced.

Conclusion : If you are doing regular FDs of small amount in Banks or Post Office for the purpose of saving, then do not look at FMP. But if you are looking for a considerable amount of investment for a fixed tenure and also looking for tax efficiency, then go for FMP. FMP is primarily helpful for people in higher tax bracket. Higher your tax bracket, more you should move your fixed investment towards FMP. I would request , next time you think of an fixed deposit, do your quick calculation and then take a decision.

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