There is always a tendency among people to look out for different alternatives while doing investments. However, there are very few occasions when people look out while investing in Fixed Deposits in a bank. Reason can be lack of knowledge about different products available. So here in this article we have discussed an alternative option of Fixed deposit available in market with all the plus and minus of it.
Fixed Maturity Plans (FMP) have been flooding in the market for quite some time now. Every week a Mutual Fund company is coming out with the subscription offer of a new FMP with different maturity period. Although, these products are not advised by many of the agents or advisors in the market as the commission payout is very less or say negligible, still there are few who understand the need of an investor and thus suggest this instrument instead of bank F.D’s, commonly known as FMP. So what exactly FMP is and how does this differ from a Bank FD?
FMPs are close –ended debt mutual fund schemes with a fixed maturity horizon, where the corpus is invested in fixed-income securities like Money Market Instruments, Commercial Papers (CP), Certificate of Deposits (CDs), Corporate Bonds and even in bank fixed deposits. The maturity period lies from one month to few years.
FMP’s are popular in the market as alternative of a fixed deposit in a bank, but come with conditions. The maturity amount of a fixed deposit in a bank is ‘guaranteed’, but in the FMP it is not mentioned. The regulator does not allow fund companies to guarantee returns, and hence even showing indicative returns’ in FMP is banned.
FMPs are close –ended debt mutual fund schemes with a fixed maturity horizon, where the corpus is invested in fixed-income securities like Money Market Instruments, Commercial Papers (CP), Certificate of Deposits (CDs), Corporate Bonds and even in bank fixed deposits. The maturity period lies from one month to few years.
FMP’s are popular in the market as alternative of a fixed deposit in a bank, but come with conditions. The maturity amount of a fixed deposit in a bank is ‘guaranteed’, but in the FMP it is not mentioned. The regulator does not allow fund companies to guarantee returns, and hence even showing indicative returns’ in FMP is banned.
How does a FMP work??
Typically, the fund house fixes a ‘target amount’ for a scheme, which it ties up informally with borrowers before the scheme opens. Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.
The NFO of FMP’s are generally open for 3 -4 days and targeted to corporate and Co-operative Societies and HNI’s. However even the retail customer can invest because the minimum investment is Rs 5,000.The fund manager invests the collected money into only those instruments that have similar maturity as of the FMP. Suppose FMP is of 1 year then fund manager will invest in only those instruments maturing in one year.
The indicative returns are easy to calculate. If one knows the current yield prevailing in the market then just deduct the expense ratio (mentioned in offer document) and the remaining will be the indicative return that you can expect from FMP.
Let us understand the difference between FD and FMP with the help of below table
Typically, the fund house fixes a ‘target amount’ for a scheme, which it ties up informally with borrowers before the scheme opens. Since the fund house knows the interest rate that it will earn on its investments, it can provide ‘indicative returns’ to investors.
The NFO of FMP’s are generally open for 3 -4 days and targeted to corporate and Co-operative Societies and HNI’s. However even the retail customer can invest because the minimum investment is Rs 5,000.The fund manager invests the collected money into only those instruments that have similar maturity as of the FMP. Suppose FMP is of 1 year then fund manager will invest in only those instruments maturing in one year.
The indicative returns are easy to calculate. If one knows the current yield prevailing in the market then just deduct the expense ratio (mentioned in offer document) and the remaining will be the indicative return that you can expect from FMP.
Let us understand the difference between FD and FMP with the help of below table
Let’s understand the difference with the help of practical example. Suppose that Mr. A invests in FD for 2 years and Mr. B invest in FMP for the same duration. Amount invested is Rs.1,00,00 and return on FD is 10%. Most probably the FMP will also show an indicative return of 9.80% to 10%. [Both Investors come under 30% tax bracket]
After two years Mr. A will get Rs.1,21,000 as maturity amount and Mr. B would probably get Rs.1,20,000 (assumed.) Now Mr. A will have to pay 30% tax on Rs.21000 which will be Rs.6300 and the value of FD after two years will be Rs.1,14,700.
On the other hand Mr. B who has now an option of either to pay flat 10% on the total gain i.e. Rs.2000/- or to pay 20% on the gain after calculating indexed value of his investment. This will be any way lesser than what Mr. A has paid. So, it is clear that FMP’s are more tax efficient and do earn better returns than fixed deposits of similar tenure.
How to know if FMP’s are available in market or not?
As mentioned above that the product is not well marketed by companies as well as by agents due to low commission payout and hence you will find very few people recommending it for your portfolio. The best way to find out about FMP is to ask your Investment Adviser or Financial Planner.
Conclusion – Whether to invest in FMP or not?
It is clear from the above comparison that FMP’s are more tax efficient then bank FD’s and are suitable for your portfolio if you are comfortable with the risk associated with it. Before investing into this product, understand your needs and if this product fits into your zone then go for it.
On the other hand Mr. B who has now an option of either to pay flat 10% on the total gain i.e. Rs.2000/- or to pay 20% on the gain after calculating indexed value of his investment. This will be any way lesser than what Mr. A has paid. So, it is clear that FMP’s are more tax efficient and do earn better returns than fixed deposits of similar tenure.
How to know if FMP’s are available in market or not?
As mentioned above that the product is not well marketed by companies as well as by agents due to low commission payout and hence you will find very few people recommending it for your portfolio. The best way to find out about FMP is to ask your Investment Adviser or Financial Planner.
Conclusion – Whether to invest in FMP or not?
It is clear from the above comparison that FMP’s are more tax efficient then bank FD’s and are suitable for your portfolio if you are comfortable with the risk associated with it. Before investing into this product, understand your needs and if this product fits into your zone then go for it.
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