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How are Fixed Maturity Plans better than Fixed Deposits?

How are Fixed Maturity Plans better than Fixed Deposits?

30/04/2018

What are Fixed Maturity Plans (FMPs)?

Fixed Maturity plans are close ended mutual funds which invest in fixed tenure bonds and other securities. Though the returns are not assured, they are predictable as the funds are invested in fixed interest securities maturing on a fixed maturity date. The returns can be anywhere between 7.25% to 8%. So, an AA rated portfolio would earn 8%, whereas AAA rated would earn 7.25%.

Tenure: FMPs are available for tenure of 1 month to 5 years.

How are Fixed Maturity Plans better than Fixed Deposits?

The big difference between FMPs and FDs is the tax treatment of returns.

Interest from FDs is fully taxable and tax rate is based on investor’s tax slab, whereas FMPs return if in the form of dividends is subject to dividend distribution tax and in capital gains form, the tax rate is @10% (or 20% with indexation).

Tax directly eats into your returns, which is why FMP is a clear winner over bank FDs. Also for longer tenure FMP investors get indexation benefit.

For example :- A 13 month (one year and one month) FMP launched in March 2018 with a maturity date of April 2019, will get the benefit of double cost indexation as you hold the investment through two financial years ending FY 2017-18 and FY 2018-19.

Table below clearly shows the superior post tax returns of FMPs

FD FMP Without Indexation FMP With Indexation
Investment Amount 1,00,000 1,00,000 1,00,000
Rate of return on Investment 7.50% 7.50% 7.50%
Period (in Months) 13 13 13
Amount at Maturity 1,08,125 1,08,125 1,08,125
Interest/ Capital Gain 8,125 8,125 8,125
Indexed Cost of Acquisition N.A. N.A 1,10,250
Indexed Gain/ (Loss) N.A. 8,125.00 (2,125.00)
Tax Rate (highest tax bracket) 33.66% 10% 20%
Tax on Interest/ Capital Gain 2,734.88 812.50 –
Post Tax Income 5,390.13 7312.50 8,125.00
Post Tax Rate (Annualized) 4.98% 6.66% 7.50%

The difference in returns clearly shows – How Fixed Maturity Plans are better than Fixed Deposits

What is the benefit of investing in FMP?

FMPs launched in March 2018 with a maturity date of April 2019 will get the benefit of double cost indexation as you hold the investment through two financial years ending FY 2017-18 and FY 2018-19.


What is the difference between FMP & debt fund?

Investment in FMP is not impacted by interest rate movement unlike a debt fund. Since the debt instruments in a FMP’s portfolio are held till maturity and earn a normal yield applicable.

What are the benefits of FMP?

1) Risk Reduction: Debt funds face 3 types of risk – interest rate risk, credit risk and liquidity risk.

  1. Interest rate risk: Since FMPs are held till maturity, interest rate changes impact is more or less eliminated
  2. Credit risk: When a FMP is launched, the scheme documents the type of credit risk it would be exposed to like AA+ or AAA. Hence, an investor should read the offer document carefully to examine the credit rating of the debt instruments the FMPs is investing in.
  3. Liquidity risk: FMPs have low liquidity risk.

2) Low Expense: As FMPs are held till maturity, the debt portfolio has very low churning of the portfolio as compared to debt funds. Hence reducing the buying and reviewing cost of the portfolio.

3) Liquidity: Even though FMPs are held till maturity, investors have an option of exiting, as FMPs are traded.

Now you know, how Fixed Maturity Plans are better than Fixed Deposits! With no further delay, buy mutual funds online that are in sync with your goals and start your mutual funds investment journey with EzeeHouse app!

 

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2 comments

john smith 24/05/2018 - 11:57 pm

Thank you for all your valuable input on this topic.

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EzeeHouse 15/06/2018 - 7:54 pm

Hi John, thank you for your feedback.

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