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A comparison between bank FD and FMP: FD versus FMP
Let’s have a FD vs FMP comparison.
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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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Note: Please treat the opinion expressed here as a broad suggestion. Please consult your financial planner / investment advisor before making any investment decision.
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Comments
Add a new CommentFMPs and just another type of mutual funds. So, you can invest in FMPs the way you invest in any other MF - through a broker, agent or online.
And yes, you can choose a dividend option for an FMP.
Mar 15, 2009
Since the interest rates in India are moving downward, there is a good possibility that debt funds would give a good return.
However, the return from debt funds would not be certain. Compared to that, the return from the bank FD is fixed.
So, if you can live with some uncertainty, you can invest in debt MFs. If you want safety, please stay with a bank FD.
At this stage, I do not recommend specific MF schemes on the website - so I wouldn't be able to help you there.
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FMP's look attractive over FDs due to the returns they offer and hence I would choose to invest something in them, for short term such as 3-6 months. Can I please know the procedure for doing the same? For my mutual funds investments, I have a broker. Can I invest in FMP's myself, may be online? I do not have a demat account. Also can I know if I can choose to get returns in form of dividends for above FMP's, so that the returns are not taxable.
Regards,
Vinayak Bhat