FDs are a great way to invest money for investors who want assured returns. FMPs are close ended debt mutual funds where returns are not assured as in FDs. Both the plans have a fixed tenure. FMPs are ideal if you are looking to park your money temporarily. In simpler terms, FMPs are the mutual fund alternative to FDs.
FMPs are closed ended funds and so investors can invest only when the fund is offered new. The investment cannot be redeemed before maturity but can be exchanged in the stock market. To protect FMPs from interest rate risk, the investments are made into income securities that mature just before the fund matures itself. FMPs invest into debt related instruments like debentures, government securities and bonds.
Here is a brief comparison between FDs and FMPs:
While FDs have assured returns, FMPs have better returns. If you are investor with low risk appetite, you can still opt for FMPs. In FDs, you invest based on your trust worthiness on the bank. But with FMPs, you can check the rating, past performance and investment objective – numbers and hard facts, before you can choose to put your money in.
If you are someone who falls under the higher tax brackets, it is better to sat away from FDs. This is because the returns from fixed deposits are added to the income of the investor and taxed accordingly. in contrast, FMPs are treated as mutual funds for the sake of taxation. There are two options – growth and dividend. Dividends have dividend distribution tax and in growth option, you would have to pay short term capital gains or long term capital gains, depending on whether you sell your FMPs before or after 3 years.If you are someone who falls under the higher tax slabs, stick to FMPs or you will end up paying an excess of amount as tax.
Also, FMPs carry indexation benefit hence returns from FMPs are more tax efficient.
The lock in period of FMPs varies from 1 month to 3 years.
Both the funds are strict in nature when it comes to liquidity. But FDs are more moderate and can be withdrawn without penalty in some cases whereas FMPs cannot be redeemed before maturity unless you pay penalty.
If you are planning to invest in FMPs, make sure you check out the rating and past performance of the fund. Bear in mind that it is slightly strenuous to find a buyer for FMPs since the trading value of FMPs are low. Because of this, exiting the fund is hard. So when you invest in FMPs, invest in funds which you won't need till the fund matures. And, last but not least, just because FMPs are less risky doesn't mean that there is no risk at all.