Moneycontrol
Aug 28, 2017 12:30 PM IST | Source: Moneycontrol.com

How fixed deposits and FMPs bolster your retirement portfolio

FMPs helps investors diversify investments across a portfolio of fixed income instruments.

How fixed deposits and FMPs bolster your retirement portfolio

Navneet Dubey

Moneycontrol News

When it comes safe investing option during your retirement, Bank Fixed Deposits and mutual fund Fixed Maturity Plans (FMP) are considered to be one of the best instruments. The objective of these plans is to provide maximum returns at a minimal risk.

While FD’s may give assured returns, FMPs give you indexation benefits. So before investing it is better to understand the two instruments in a simple way:

Fixed Deposits

Fixed deposit simply means a sum of money deposited for a specific duration. The amount you deposit gets locked for a specific term. However, in case of any urgency you can withdraw your money before but for that, you need to pay premature withdrawal charges. The interest rate offered under this debt category is kept fixed, which is also higher than the savings account interest rate.

“Fixed deposits typically offer safe and assured returns. They are one of the most popular savings instrument in India. The interest is paid out monthly, quarterly, half-yearly, or annually, with the option to reinvest interest income and gain the benefit of compounding. While traditionally, one had to go to the bank or post office to open an FD, today, it is possible to do the same online without any paperwork or wet signatures. With a few clicks, you can compare FDs, select the one you like, transfer funds online, and receive the receipt, without having to visit the bank,” said Ajit Narasimhan, Head – Investments, BankBazaar.com.

Fixed Maturity Plans

Fixed Maturity Plans are usually closed-ended debt schemes which come with a fixed maturity date. FMPs invest in commercial instruments, well-rated corporate bonds, and various money-market instruments. These plans provide assured earnings—unless something drastic happens—as they are insulated from the fluctuations in the market value of the investments. The basic rule in the FMP is to park money in an instrument that has a similar maturity date.

“FMPs helps investors diversify investments across a portfolio of fixed deposits or fixed deposit-like instruments. As they are offered by mutual fund companies, they have the advantage of investing in specific fixed income instruments that may not be available to the individual retail investor,” added Narasimhan.

Also Read: Are you about to retire? Here's how your retirement portfolio should look

Here are some factors which may help you understand the two instruments better.

 Liquidity

If liquidity is taken into consideration, the bank fixed deposit ends up slightly in front. Though both investment options have a tight leash on liquidity, an investor can exit an FD with less damage. But in the case of an FMP, one has to pay out a heavy exit load. So if an investor doesn’t need a certain sum of money for a specific period, then he can take the FMP route.

 Risk

Fixed maturity plans have slightly higher risk as compared to Fixed Deposits. Though the money is in safe hands while opting for FMP, however, there is no guarantee. That doesn’t mean that FMPs are very risky but relatively riskier than FDs. In the case of bank fixed deposits, they are a safe instrument and there is also an insurance cover of up to Rs 1 lakh on your deposit.

 Returns

Banks and company FD usually offer returns in the range of 6-9% which are specified depending on the deposit tenure. Historically, over a period of time, one may get an average FMP rate of return at around 8-9%. However, FMPs returns are not guaranteed since they are treated as close-ended debt MF’s. This will be the base earning for the investors which do not involve income tax factoring. However, it is to be noted that the interest rates may change due to external factors, but once you are invested in either scheme, the rate is assured.

 Taxation

In the case of FMPs, for up to one year, the income from these debt MFs is added to the total income for tax calculation at a marginal rate of tax that is, it gets calculated as per the slab the investor falls in. Whereas for the long term, which is more than 3 years, FMPs gets the advantage of the indexation benefit. The indexation benefit helps investors to pay tax only on the real gains (inflation adjusted) which they made during the course of time. The tax liability based on indexation benefit is charged at 20% plus surcharge.

In the case of FDs, the tax calculation is very simple as there is no division of short term and long term investment. Whatever interest you receive from the fixed deposit scheme gets added to the total income and tax is calculated and deducted accordingly as per the tax slab in which the investor falls in. However, if interest income earned from your overall bank FDs is less than Rs 10,000 a year, then in such case bank do not deduct any tax at source. Also, if the annual income is not taxable in case of housewife’s or senior citizen, no tax is deducted at source.

Both the instruments are better for every individual. The only things you need to understand is your risk appetite and risk tolerance capacity before taking any decisions while investing in such kind of investment avenues.
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