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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
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.

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