Fixed Maturity Plans V/s Fixed Deposits

I hardly write on personal finance but suddenly thought of doing a story over it as one of my very good friend explored this part.

The point raised was whether FMP ( Fixed maturity plans ) or FD ( Fixed deposits) who offers best returns ?

Lets try to understand the fundamental difference and similarities between them before jumping to the conclusion.

  •  FMPs are issued and managed by mutual funds while bank fixed deposits are managed by banks
  • While bank fixed deposits (FDs) are deposits in bank debt instruments

FMPs are debt instruments managed by mutual funds in typically Govt backed securities, and corporate fixed deposits.

The fundamental similarity between FMPs and bank fixed deposits is that both FMPs and Bank FDs are both close ended- both fixed maturity plans and FDs have a definite maturity end date

For example, all of us are aware of fixed deposits offered by banks that are of 6 months , 1 year , 2 years or 5 years maturity. Similarly, fixed maturity plans (FMPs) have a definite end date that could range from a month to a few years
Also, both FMPs and bank FDs (fixed deposits) are fundamentally debt instruments that typically (more about that later!) do not have an equity component

FMPs offer better post tax returns than bank fixed deposits (FDs)
( More realistic if the investment is greater than 1 year)

Taking a hypothetic example :

FMP Yield 9.30%
Tenure of FMP 370 days
Indexation rate (assumed) 5.00%
Long term Capital Gains tax rate 22.66%
The benefit of indexation for a FMP investor
Amount invested (assumed) (Rs) 100,000
Cash receivable on maturity; total interest @ 9.30% (Rs) 109,513.24
Indexed cost (Rs) 105,000.00
Taxable income (Rs) 4513.24
Tax payable (Rs) 1022.7
Post tax return (assumed) 8.30%

As the above table shows, even if the FMP has a small indicative yield of 9.3%, the post tax yield for the Fixed maturity plan is 8.3%.
Comparatively, the post tax yield for a similar bank FD yielding pre-tax benefits of 9.3% will be yield post tax just 6.3% , at the highest tax slab.

The Risk Factor :

Fixed maturity plans managed by mutual funds typically lock in their debt investments at the time of the FMP issue, there is the risk of corporate debt default, especially , if the investment in FMPs is of non AA or non AAA rated securities

However, in these times of even banks potentially failing, the risk of corporate debt default is minor, if the FMP invests in AAA and AA rated securities.

Happy investing 🙂

2 thoughts on “Fixed Maturity Plans V/s Fixed Deposits

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