Fixed Maturity Plans, or FMPs, are pitched against bank fixed deposits (FDs). So, how do they compare with fixed deposits? Which is better if we do a “fixed maturity plan v/s FD” analysis?
Let’s have a FD vs FMP comparison.
| In “Understanding Fixed Maturity Plans (FMP)”, we talked about the various features of FMPs. But since FMPs compete against bank FDs, let’s have an “FMP v/s bank FD” comparison, so that we can understand the advantages and disadvantages of each against the other. |
Fixed Maturity Plan (FMP) | Fixed Deposit (FD) | |
Asset Class | Debt | Debt |
Offered by | Mutual Funds (MFs) | Banks |
Safety | Quite safe, but less safe compared to bank FDs | Very safe, safer than FMPs |
Type of investment | Fixed duration | Fixed duration |
Duration of investment | 1 month to 3 years | 15 days to 10 years |
Money invested in | Commercial Paper (CP), Certificate of Deposit (CD), Money market instruments, corporate bonds and bank FDs | NA |
Rate of return | Usually beats inflation by a small margin, return is better than bank FDs | Usually beats inflation by a small margin, return is a little lesser than FMPs |
Rate of return (at the time of investment) | Indicative, not guaranteed | Guaranteed |
Expense Ratio | 0.25% to 1% per year | 0% |
Exit Load | From 1% to 3% | From 0% to 1% (Penalty for breaking an FD) |
Income tax (IT) treatment of returns | Dividend: Tax free Short term gain: Clubbed with that year’s income, and is taxed as per the applicable IT slabs Long term gain: Taxed at a special rate – 10% without the benefit of indexation, or 20% with the benefit of indexation. | Interest earned is clubbed with that year’s income, and is taxed as per the applicable IT slabs |
(Want to know the current IT slabs? Please read “Income Tax (IT) Slabs / Brackets – FY 2008-09 AY 2009-10”)
(Want to know the classification of gains as long term and short term? Please read “Long Term and Short Term Capital Gain – Income Tax Calculation”)
(To know the cost inflation index – CII – for various years, please read “Long Term Capital Gains (LTCG) on Sale of a House – Calculation and Income Tax”)
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