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fmp vs fd


What is Fixed Maturity Plan (FMP)?

Fixed Maturity Plan (FMP) is a type of debt mutual fund investment that has a fixed maturity which ranges from 1 month to five years. FMP is a close ended fund where the investor is only allowed to invest during New Fund Offer (NFO) and can redeem after maturity. After NFO closes, no new investment can be made. Pre-mature redemption is not allowed. Lets read all about FMP, comparison of FMP and FD.

Where does FMP invest money?

FMP mainly invests in debt market or money market instrument. The following are the main investment instruments:

  • Bank FDs
  • CPs (Commercial Papers)
  • CDs (Certificate of Deposits)
  • Government Securities (G-Secs)
  • T-Bills (Treasury Bills)
  • Liquid scheme units
  • Securitized Debt Instruments
  • Cash-equivalent Investments
  • Highly-rated NCDs (non-convertible debentures)

Are FMPs taxable?

The interest income received from FMPs is taxed according to investors income tax slab like investor in 30% tax slab will pay 30% tax on interest received. So, Fixed Maturity Plan is not tax efficient investment option if maturity period is less than 3 years.

But investments held for more than 3 years are taxed as Debt funds for the long term and Long Term Capital Gains of 20% is applied. Investor gets benefit of indexation too. With indexation, investors can increase the purchase price of FMP units in compliant with inflation so it gives more tax benefit to investors. But benefit of indexation is available for only FMPs having more than 3 years of maturity period.

Read more: Taxation and Tax Saving Options in India

What are the features of Fixed Maturity Plan(FMP)?

  • Fixed Tenure: Maturity period of FMP is fixed and once investor makes investment during NFP, the investment is locked in till maturity. This makes sure that investor’s money remains in scheme to get maximum benefits. Generally, the maturity period of FMP is 3 years so it makes sure that investor gets benefit of indexation for tax benefit.
  • Close ended Scheme: Investor can invest in FMP only during NFO. No investments can be made once NFO period is over. Redemption is allowed after maturity of the scheme.
  • Sensitivity of Interest Rate: Scheme holds investment till maturity so there is minimum exposure to interest rate. So, it gives a fixed rate of return.
  • Low Credit Risk: FMP makes investment in high quality debt and money market instruments so it tends to give low level of credit risk to investors.
  • Highly tax efficient after 3 years: As discusses above, indexation makes it tax efficient. But benefit of indexation is not available for FMPs having less than 3 years of maturity period.

What are the limitations of FMPs?

  • Returns are not guaranteed: Though it comes with low credit risk, returns from FMPs are market linked so it does not guarantee zero risk.
  • Low Liquidity: Investor has to keep principal amount locked in for fixed given time. Investor is not allowed to withdraw partial amount.  

What is the difference between Fixed Maturity Plan (FMP) and Fixed Deposit (FD)? FMP vs FD

Investors consider Fixed Maturity Plan and Fixed Deposit similar but only lock in tenure is a common factor in both. FMP is a type of debt mutual fund which invests in debt and money market instrument.  

 Fixed Maturity Plan (FMP)Fixed Deposit (FD)
ReturnReturns are related to MarketFixed Return
TaxationFMPS having more than 3 years maturity plan are taxed for Long Term Capital Gains of 20% with indexation is applied.Taxed as per investor’s income tax slab
Maturity PeriodVaries scheme to scheme but generally its 3-4 yearsVaries from bank to bank but generally its 7 days to 10 years
LiquidityLow liquidityPremature redemption possible with penalty

Is FMP better than FD?

As mentioned in above table of FMP vs FD, FMP does not guarantee return whereas FD guarantees return but FMPs are known to give higher return than FDs. But FMP does not provide premature withdrawal and with FD its possible to withdraw prematurely with penalty.

Who should invest in Fixed Maturity Plan(FMP)?

FMPs are known to give higher return than FDs but returns from FMPs are not guaranteed. But FMP invests in debt market so it fluctuates less than stock market. So, investors who are not comfortable with volatility of equity market or equity related schemes can invest in FMP.

But investor has to consider the fact that he cannot redeem money till maturity.

Do FMPs offer guaranteed return?

No, FDs offer guaranteed return but Fixed Maturity Plan mentions indicative return at the time of NFO. But the return can be lower or higher at the time of maturity. But generally there is minor difference in indicative and actual returns.

Why do people prefer FMP over FD?

As we read above about FMP vs FD, FMPs do not guarantee return whereas FD guarantees return. But FMP provides tax benefit of long term capital gain with indexation whereas FD does not provide tax benefit.

Post Author: ashwini

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