Fixed Maturity Plans loses sheen after recent Budget has taken away the tax advantage it had, thus leaving it in a neck to neck competition with fixed deposits.
Fixed Maturity Plans vs. Fixed Deposits
|Basic Structure and Tenure||Fixed Maturity Plan is a close-ended debt mutual fund in which investments can only be done when it offers for subscription. The tenure of FMPs ranges from minimum of 15 days to several days such as 369 days, 542 days 1100 days etc. Dividend can be paid out regularly by opting for dividend payout option but a dividend distribution tax is levied on it. In case dividend payout is not opted than dividend will be paid out at the time of maturity along with the principal. Fixed Deposit is a simple banking instrument in which you deposit a specific sum for a specific time period. The tenure starts from as little as 7 days to 10 years. Bank pay a fixed interest rate on the deposit which can either be paid out at regular interval or allow it to be compounded over the tenure of FD. The interest shall be included in the taxable income and taxed as per the slab rate.|
|Liquidity||In the time of emergency fixed deposit can be broken by paying a small penalty and 1% interest will be deducted. On the other hand FMPs are listed on stock exchange theoretically but practically getting out the FMP before the maturity is not possible.|
|Safety||Fixed Maturity Plans is a debt fund which majorly invests in debt instruments like G-Secs, treasury bills, bonds, money market accounts etc. to give but the maturity amount in FMP is not guaranteed. On the other hand maturity amount of Fixed Deposit is guaranteed. FD upto 1 lack is also insured by RBI.|
|Taxation||As per tweaks made in the Budget 2014, FMPs held for over 3 years qualify as long-term capital gains and are liable to be taxed at 20 per cent, with indexation benefits. Shorter holding periods attract short-term capital gains tax, which is levied at income tax slab rates. FDs are taxed at these slab rates.|
Keeping in view the above points, for the Investment with timeframe of over 3 years, Fixed Maturity Plan is superior to Fixed Deposit, especially for the taxpayers fall in 20% and 30% tax slabs. Even if the inflation rate restrain sharply in the next few years, indexation benefit will make the return of Fixed Maturity Plan much attractive than Fixed Deposit. This compensates for the higher uncertainties in fixed maturity plans.
For example, the highest rate on fixed deposit for a period of over 3 years is 9.25% currently. Post-tax, this could reduce to 6.6% to 8.4%, depending on your tax slab. If a fixed maturity plan only just equals this return, assuming that inflation retains its current level, post-tax returns could be above 9 % even in the 10 % tax bracket.
But for investments with 1 year to 3 year timeframes, Fixed Deposits are a better bet.
The highest rate on fixed deposits for a period of one- to three-year is 9.4%, with zero risk. In the past, shorter-term fixed maturity plans have given an annualized return of 9% to 10%. But with the tax advantage stripped away, the returns of fixed maturity plans are hardly superior and involve more risk.
To beat Fixed Deposit fund managers of Fixed Maturity Plan can invest in instruments bearing high credit card and offering high interest rates, but this increases the risk and if your strategy is to take only little risk than fixed deposit should be your choice.