Home » News » Personal Finance»Fixed Income - Bank Deposits
Jun 18, 2012, 03.13 PM | Source: Moneycontrol.com

FMP is better than bank fixed deposit

Traditionally almost around 85% of the people in India invest their surplus funds in Bank Fixed Deposits, Postal Schemes etc. This clearly indicates that safety and security of the principal amount is the first priority when it comes to investment.

Pankaaj Maalde, CFPcm , Head- Financial Planning, Apnapaisa
Pankaaj Maalde
Apnapaisa

Traditionally almost around 85% of the people in India invest their surplus funds in Bank Fixed Deposits, Postal Schemes etc. This clearly indicates that safety and security of the principal amount is the first priority when it comes to investment. Nobody cares whether the accretion on such investment is taxable or not. Also people do not evaluate whether the post tax returns will be able to beat inflation or not. Nobody can certainly deny the importance of safety but one has to always search for and evaluate the options which are equally safe but can give help you generate better returns or can give tax advantage over other equally safe investment avenues. It is important to have debt in your investment portfolio but it should be limited to certain percentage of total assets depending on time horizon and your risk profile.

Thumb rule says debt must constitute minimum equal to one’s age in percentage terms but it is advisable to allocate funds in debt depending on time horizon of your particular financial goal. If time horizon for a particular goal is just 1 year to 1.5 years than 100% of such corpus in debt makes sense. Most of the investors invest their funds in bank fixed deposit for time horizon of 1 to 1.5 years. But there are other alternatives available in the market which can give you better post tax returns compared to bank FDs and are equally safe. Mutual Funds FMP (Fixed Maturity Plans) are the better alternative for time horizon of around one year investments compared to bank fixed deposits which not only gives higher return but are also tax efficient. FMPs are closed ended schemes with the maturity period ranging from 370 days to 390 days which are commonly known as 1 year FMP. The maturity period of FMPs may vary from 90 days to three years but most prevalent and tax FMPs are one year FMPs.

Here we will discuss the pros and cons of only 1 year FMPs. These schemes invest 100% of their corpus in debt portfolio which consists of corporate and government bonds or Certificate of deposits issued by banks which are safe and rated. The funds thus invested are relatively safe compared to income funds as the volatility in the interest rates will not affect returns of the fund as the entire corpus collected in the scheme is invested for the fixed term which is almost equal to the tenure of the fund. These funds are closed ended in which investment can be made only during the NFO period. The schemes get listed at recognised stock exchanges but effectively these are not traded and volumes are negligible so one has to hold this till maturity for all practical purposes. Thus they are almost at par with bank FDs as far as tenure of investment and risk is concerned. The only difference is that in case of bank fixed deposit you know what return you will get at the time of making the deposit itself. Whereas in case of FMP the returns are not guaranteed it is market linked and returns will depend on the return of the portfolio. However one can find out as to what will be the indicative investment return from a particular FMP. The returns on this are higher than bank fixed deposit because they are floated for identified borrowers and as the volume size is big, they can easily negotiate for better deal. Moreover income arising out from this will be taxable under the head long term capital gain as the same is held for more than one year and investors get benefit of indexation. Please note that the benefit of indexation and concessional tax is not available in case of bank FD.

Since the FMP looks better than bank FD and if one wants to invest in FMP what one should look for while investing in FMP?

The one most important thing an investor needs to check before investing is the ratings of the portfolio in which the fund is likely to be invested. The investors should invest only in the schemes which will invest their funds in AA+ and above rated papers or bonds. The funds which invest in AA- papers or bonds or lower rated are more risky and one should be aware of risk involved in such schemes. For past one year of 1 year FMP is around 10% and above as compared to bank fixed deposit rate of 8.50%. Needless to say an FMP not gives higher return compared to fixed deposits but also has added tax advantage.

The writer is CFPcm , Head- Financial Planning

Apnapaisa is India's leading price comparison site for financial products such as loans , credit cards and insurance plans.

READ MORE ON  Pankaaj Maalde, Apnapaisa, FD, FMP

ADS BY GOOGLE

Ask the Experts

Get your Personal Finance queries answered

  • Q

    If I put Rs 2 lakh in PPF, how much tax rebate I will get?

    A

    As per the existing guidelines and rules a person cannot deposit more than 1.5 lacs in one PPF account. However you can deposit money in the...

  • Q

    Interest rates are going to go down. And all my fixed deposits will be maturing next year. I will have to renew my fixed deposits next year at lower rate of interest. What is the way out?

    A

    Interest rates keep fluctuating due to various micro- and macro- economic factors. There is never an ideal rate of interest. In a high inter...

  • Q

    I want to buy online term life insuance plan. Which is the best one? Should I go for single premium or regular premium policy?

    A

    Single premium term insurance policies don?t make much sense. Why pay such a large amount at one go when you have the option of paying in sm...

  • Q

    I want to invest some money with at least ten years view. I dont want share market risk. Can I invest in NSC? Is there any other investment option?

    A

    NSC or National Savings Certificate is a safe investment scheme offered by the Central Government. It is an ideal option for investors with ...

  • Q

    My CA says that I have to pay tax on interest accrued on my FD of Rs 20 lakh. I have submitted form 15H in all banks. Is it necessary to pay tax in this case?

    A

    In case of interest on fixed deposits which is taxable under the head ?Income from other Sources? a taxpayer has two choices. Either you can...

  • Q

    I want to save my money for retirment Please suggest a good insurance policy

    A

    For retirement it is advisable to use multiple investment instruments and not just life insurance policies. If you have 15 years or so for r...

  • Q

    IS IT a Good time to invest in GOLD ?

    A

    Currently the outlook for gold is bearish/negative. However if you are planning for a long-term investment in gold it is ideal to invest the...

  • Q

    I have retired from my job in November. I have got Rs 48 lakh from my employers, by way of epf, gratuity and other benefits. Should i invest in senior citizen scheme of LIC? How about pension plans from LIC?

    A

    1. You can invest Post office Senior Citizen Scheme. 2. You also should invest lumpsome in MIP in post office and get monthly interest. 3. K...

  • Q

    I want to save Rs 1 crore for my retirement when i turn 60. Now I am 42 years old and have fixed deposits worth Rs 18 lakh.What should I do to reach Rs 1 cr mark?

    A

    start investing a minimum 5000 per month in mutual fund and increase 10% to 20% every year....

  • Q

    Is it a good idea to invest in asset allocation funds? if yes, please suggest some good fund to invest money. I am 35 years old and can invest Rs 10000 per month.

    A

    Reliance Top 200 Equity is good for better return in diversified Sector....

  • Q

    I want to save on my utility bills and fuel expenses.Please suggest a good credit card for me.

    A

    Yes, you will be able to save on Utility bills and fuel expenses through the cash back schemes offered by some of the credit card companies....

  • Q

    Please suggest a good money back policy for me. I am 27 years old and want to accumulate Rs 10lakh over 10 years.

    A

    If you are a fan of traditional money back policies, go in for the LIC New Money Back Policy of 20 or 25 years. I would suggest you go in fo...

  • Q

    I want to buy a life insurance for my brother Please suggest a good policy. He is 19 years old. he should get Rs 5 lakh when he turns 25 years.

    A

    Best to go in for a ULIP in case he is looking to grow the money also. Go in for a ULIP like HDFC Click 2 Invest which is very low on charge...

  • Q

    In 2013, I bought an Endowment policy from LIC. Premium for that is around 35K per year. Now i understand, this was a big mistake and i want to go for a term insurance policy. I have already paid two premiums in 2013 and 2014 and I want to make this policy paid-up. Can i pay one more premium this year and make that endowment policy paid-up ? Or is there any better alternative ? Please suggest.

    A

    Yes, you can convert to a paid-up policy after 3 years premiums have been paid. I would recommend that you surrender the plan and take back ...

  • Q

    Is zero depreciation cover a good option under auto insurance? I have plans to buy honda city in January

    A

    Zero depreciation is a good option to along with the standard car insurance plan. By paying a slightly increased premium you can ensure that...

  • Q

    I am 20 years old,I am getting 17+ % or returns from share in my portfolio consistently for the last 6 months.should i think about a career in stockbroking?

    A

    Its nice to note that your portfolio has been gaining such high returns, however it might be too early to take a call and make stockbroking ...

  • Q

    Can investing in shares help me to save for my retirement? If yes, please suggest some shares.

    A

    You must not enter in share market at this stage, unless you are expert in this field. You should invest in equity through Equity Mutual fun...

  • Q

    Can postal savings and PPF together make a good retirement planning tool? I dont want to take share market risk?

    A

    No. You must give atleast 20-30% exposure to equity mutual fund. Saving and PPF will not beat the inflation....

  • Q

    How much tax rebate I get if I pay a premium of Rs 22000 for my parents' health insurance and Rs 12000 for accident insurance.

    A

    Under Section 80 D, you can claim deduction for insurance premium paid for any health insurance policy purchased by you for you and your fam...

  • Q

    I took a personal loan of Rs 2 lakh and repaid all the money. However the bank has recorded me as a defaulter in CIBIL. What should I do?

    A

    Please speak with the lender immediately to understand the issue. If their response is justified, you should pay the due and request them to...

Explore Moneycontrol

Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.