What are Fixed Maturity Plans
(FMPs)?
FMP is Fixed Maturity
Plans where money is invested in Debt instruments i.e. Commercial
Papers of
Corporate, Certificate of Deposits, Money Market Securities, Government
Securities and other fixed income instruments. Return in FMP is stable
compared
to equity market investments. However return is not fixed as in case of
Fixed
Deposit.
Period
of FMP
FMPs are
generally launched for a period of slightly more than one year
generally from 366
Days to 3 Years.
However FMP for less
than one year are also available. Generally period is kept more than
one year so
that investors can avail tax benefit of long term capital gain.
FMPs are close
ended schemes i.e. you can invest only at the time of offer by mutual
fund
house. Afterwards, you can buy it through Stock Exchanges.
Minimum
and Maximum Amount to be invested
Minimum
Investment amount is generally Rs.
5000 and there is no limit of maximum amount to be invested.
What
if I need money before Maturity
FMPs cannot be
redeemed before maturity. However, the same are listed on Stock
Exchanges and
can be sold there. But FMPs are very illiquid in stock market. Hence it
is better to invest in FMP after keeping contingency fund in some
liquid investment options.
How
do FMPs compare with FDs
FMP
is very similar to Fixed Deposit,
however there are some basic differences mainly in taxation which make
FMP
lucrative for Tax Payers. A Comparative Chart of FD and FMP is give
below:-
| Particulars |
FD |
FMP |
| Safety |
FDs
are generally considered to be safest option available to small
Indian investor.
However in case banks fail, deposit only to the extent of Rs. 100000 is
insured
by RBI. |
FMP
are also considered to be safe as they invest only in fixed income
securities.
However in case of crisis in economy possibility of risk cannot be
denied. It
can be said that these are slightly more riskier than Bank FDs but lot
more
safer that Equity market investments.
|
| Liquidity i.e. option to get money during the tenure of
investment |
FDs
can be encashed during the period of investment. In such case investor
is
generally eligible for interest prevailing (for the period which amount
has
been actually kept invested) less some penal interest. |
FMPs
are listed on Stock Exchanges but not frequently traded hence it may
not be
possible to sell them immediately at the time of need of fund. There is
no
option to redeem FMP in between investment period through Mutual Fund
House.
|
| Taxation |
FD
interest is added in your income and taxed at marginal rate
of tax
applicable
for you. In case you are falling under 30% tax slab post tax return in
case of
FD will be significantly less. |
In
case of FMPs are redeemed after three years, long term capital gain tax
is
applicable @ 20% with indexation benefit. This results in effectively
low tax. This
is why FMPs are getting popular among highest taxpaying investors.
|
| TDS
( Tax Deduction at Source) |
TDS
is deducted at Source if Interest amount during a year exceeds Rs.
10000.
However, Form
15G / 15H can be submitted to avoid TDS, if your income is
not
taxable.
|
No
Tax is deducted at Source |
| Period |
FDs
are available for a period ranging from 15 days to 10 Years.
|
FMPs
are generally available for period 366 days to 3 Years. |
So
what should we do finally?
FMPs can be
considered as an alternate investment to FD. After keeping some funds
for contingency in some liquid investment options like FD, additional
amount can be allocated among different mutual
fund houses FMPs. If you are a tax payer, post tax returns are
significantly
higher in FMP compared to FDs.
However, FMPs
are no way comparable with Equity Mutual Fund Schemes, which are high risk high return proposition but
still recommended for very long term investments like more than 7 years.
If you are a tax
payer specially falling in the tax
bracket of 20-30%, it is advisable to keep additional money in FMP
instead of
Fixed Deposit.
For any clariication /
Suggestion feel free to write us at arpita@tdsmaster.com
|
