Why you should prefer Fixed Maturity Plans than FDs?
In India most of the investors prefer investing money in Bank Fixed Deposits(FD), post office saving despite which currently offers interest rates in the range of 6.25% to 7.5%. Its tenure can vary from one year to ten years. People seeking slightly higher return park their money in Corporate FDs which normally topped notch rated paper like AAA or AA kind of rating. Corporate FDs offers slightly higher than a bank FD. The interest rate currently in a range of 7.5% to 8.5%. Further the tenure ranges from one to five years. Still if people who wants more returns then they start parking money in co-operative banks which offers more than a corporate, but the risk is also equally higher. Here people can expect the returns between 8-10% and tenure can be between 1 to 10 years.
So most of the times a question arises on investors mind is, can we get the benefit of fixed returns with manageable risk and still get a better tax adjusted return? Is there any product available?
Yes, the product is Fixed maturity plan (FMP) which is offered by mutual funds.
Fixed Maturity Plan (FMP)
FMP is a closed ended debt mutual fund which invest in a mix of corporate bonds and sometimes in government bonds. The tenure of the FMP ranges from monthly, quarterly or annually. All the schemes offer keeps coming in the market on from time to time basis. FMPs mainly invest in AAA, AA and A rated paper.
The mutual fund which invest in an AAA oriented companies, the risk on that product is little lower and returns will also be lower. Suppose a mutual fund invest into A rated or AA rated companies, then you can expect slightly higher return. But the risk will also be higher.
How FMP is better than a Bank FD?
In the gains you won’t find any difference between the Bank FD and FMP. The benefit part comes when you look at the taxation. Bank FD does not enjoy the index cost of investment benefit. This benefit is in provision by the income tax act because the Rs 100 which you invest today. Or that you’re holding today is not the worth of it is the same tomorrow. It is due to inflation which is called as time value of money. In Bank FD you will not get this benefit while computing the tax.
Interest income difference:
Post tax FD on an 8% FD will vary anywhere from 5.7% to 7.20%. Whereas in FMP, since you get the benefit of indexation, post tax returns improve a lot. So Rs 240 will be your post tax return and post-tax yield on FMP will be 7.40% irrespective of whichever tax bracket you are falling into.
So, you can use this benefit of investing in FMP then in Bank FD. Still try to make a better return than Bank FD.