We are sure that you as an investor must have come across this dilemma as to what to choose from – a Fixed Maturity Plan (FMP) offered by a mutual fund house, or a Fixed Deposit (FD). Well it’s confusing for an investor because both of them start with the word ‘Fixed’. So, now let us understand what exactly a FMP is and how it is different from a FD.
A Fixed Maturity Plan is a close-ended fund that invests in debt and money market instruments of similar maturity as the stated maturity of the plan. That means a 90 day FMP will invests in debt and money market instruments which mature in 90 days like 3-month Certificate of Deposits (CDs), 3-month Commercial Papers (CPs) etc. An interesting point to be noted here is that unlike a FD where your maturity amount is fixed, in a FMP only the period or time horizon of the fund is fixed. As such a 90-day FMP will cease to exist on maturity.
The distinguishing feature of a FMP is its indicative return unlike a FD where you know the fixed amount receivable at the end of the maturity period of your FD. So a 90-day FMP at a time where 3 month instruments are yielding 8.0% p.a. does not mean that you will get assured returns of 8.0% p.a., but it is just an indicative yield that highlights the return generating potential of the instrument.
You might say then ‘why I should opt for a FMP where the returns are just indicative and not fixed?’
FMPs are not all that bad as they seem. The tax implication on FMPs gives it a leg-up over a FD. The tax implication on FMPs depends on the investment option one chooses – dividend or growth.
In case of dividend option, investors have to bear the Dividend Distribution Tax (DDT) of 13.84%.
Whereas in case of growth option, returns generated are treated as capital gains and taxed accordingly. Thus, in case of short-term capital gains (i.e. if investments are held for less than 365 days); the interest income is added to the investor’s income and is taxed at the marginal rate of tax. And where investments are held for more than 365 days (long-term capital gains) the tax liability is computed using two methods i.e. with indexation (charged at 20% plus surcharge and cess) and without indexation (charged at 10% plus surcharge and cess); the tax liability will be the lower of the two.
375 days FMP or a 375 days FD
|Particulars ||FMP (with indexation) ||FD |
|Amount invested () ||100,000 ||100,000 |
|Assumed rate of return / interest (p.a.) ||8.25% ||8.25% |
|Tenure of investment (days) ||375 ||375 |
|CII-Year of investment (2009-2010) ||632 ||NA |
|CII-Year of maturity (2010-2011) ||711 ||NA |
|Indexed cost () ||112,500 ||NA |
|Value at maturity () ||108,476 ||108,476 |
|Interest income () ||8,476 ||8,476 |
|Capital gain / loss adjusted for indexation () ||-4,024 ||Nil |
|Applicable tax rate ||22.66% ||33.99% |
|Long-term capital gains tax liability () ||0 ||2,881 |
|Net gain () ||8,476 ||5,595 |
|Post-tax returns at maturity (p.a.) ||8.25% ||5.45% |
(Interest rates and tenure are assumed. Actual rates offered will be different. CII = Cost Inflation Index)
(Source: PersonalFN Research)
The above table depicts that if you fall in the highest tax bracket, the post tax returns you enjoy in a FMP (tenure over one year) are far superior from that of a FD (tenure over one year). After claiming the indexation benefit as you have long term capital loss, the post-tax return enjoyed by you in a FMP is entire 8.25% p.a. whereas a similar tenure FD generates just 5.45% p.a.
90 days FMP or 90 days FD
|Particulars ||FMP (Dividend Option) ||FMP (Growth Option) ||FD |
|Amount invested () ||100,000 ||100,000 ||100,000 |
|Assumed rate of return / interest (p.a.) ||8.25% ||8.25% ||8.25% |
|Tenure of investment (days) ||90 ||90 ||90 |
|Value at maturity () ||102,034 ||102,034 ||102,034 |
|Interest income () ||2,034 ||2,034 ||2,034 |
|Applicable tax rate / DDT rate ||13.84% ||33.99% ||33.99% |
|Dividend Distribution Tax ||282 ||- ||- |
|Short-term capital gains tax liability () ||- ||691 ||691 |
|Net gain () ||1,753 ||1,343 ||1,343 |
|Post-tax returns at maturity (p.a.) ||7.11% ||5.45% ||5.45% |
(Interest rates and tenure are assumed. Actual rates offered will be different. DDT = Dividend Distribution Tax)
(Source: PersonalFN Research)
The above table depicts that if you fall in the highest tax bracket, the post tax returns you enjoy in a FMP - Dividend Option (tenure less than one year) are far superior from that of FMP - Growth Option (tenure less than one year) and FD. The post-tax return enjoyed by you in a FMP - Dividend Option (tenure less than one year) is 7.11% p.a. whereas a similar tenure FD generates just 5.45% p.a.
In a nutshell…
FMPs are superior to FDs in terms of post-tax returns. However, before investing please ensure you have the right risk appetite for a FMP as said earlier there are no assured returns in a FMP unlike a FD. Also in case of bank fixed deposits, the Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) guarantees repayment of 1 lakh in case of default. There is no such guarantee offered in company deposits and the safety of your deposit depends on the financial position of the company.
- In FDs the rate of return is fixed, while in FMPs the period of maturity is fixed
- Returns on FMPs are not guaranteed while FDs offer guaranteed returns. But only bank FDs are guaranteed with repayment of 1 lakh in case of default, while incase of company FDs, the safety depends on the credibility of the company
- If you fall in the highest tax slab and want to invest in a FMP with tenure of over 1 year, then investment in Growth option will help you enjoy high post tax returns
- Similarly if you invest in a FMP with tenure of less than 1 year, then investment in Dividend option will help you enjoy high post tax returns