Fixed Deposit Vs Fixed Maturity Plan

By
Hemant Beniwal
80

What is an FMP?

Fixed Deposit Vs Fixed Maturity Plan

Fixed Maturity Plan (FMP) is fixed tenure, debt-based scheme, which terminate on a pre-determined date. FMPs are ideal for those investors who  wish to park their funds  for a  specific period.

The return of these schemes are predictable as money is invested in fixed interest based  securities  maturing in the line with the maturity of the underline FMP.

The portfolio comprises of bonds, which normally mature in line with the defined period of the FMP and are passively managed with an eye on interest income rather than the trading profits.

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Tenure: FMPs are available for as short as 1 Month to even more than 5 years.

How an FMP is better than Fixed Deposit ( FD)?

The major difference is the post tax returns of these instruments. Interest on Bank FDs is fully taxable u/s 56 and gets taxed at the highest rate at which the individual/assessee pays tax whereas the return from FMPs is either subject to the Dividend Distribution Tax (for the dividend option) or the capital gains tax rate (for the growth option). The Distribution Tax rate is @14.16% and the capital gains tax rate is @10% (or 20% with indexation). These taxation rates are lower than the income tax rate applicable on Fixed Deposits, especially in the case of investors in the higher tax bracket. Tax directly eats into returns, which is why FMPs have the edge over Bank FDs. Also for longer tenure FMPs the indexation benefit is allowed.

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Take an example of a 13-month(1 year & 1 Month) FMP which, if launched now, will mature in April 2011. It will pass through two financial years – launch in 2009-2010 and maturing in 2011-2012. Thus, it can have a benefit of double cost indexation for the purpose of calculating its cost of purchase (post-tax yield). Look at the workings: Note: Cost Inflation Index for FY09-10 is 632. The assumption is that the CII for FY11-12 will be 697. * Approx CII growth @ 5% (It depends on inflations figures). Clearly, the post-tax return is superior for an FMP.

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FMP

Bank FD

Without Indexation

With Indexation

Investment Amount (Rs.)

1,00,000

1,00,000

1,00,000

Assumed Net Yield to investor (p.a)

7.50%

7.50%

7.50%

Tenor (Months)

13

13

13

Amount at Maturity (Rs.)

1,08,125.00

1,08,125.00

1,08,125.00

Interest/Long Term Capital Gain

8,125.00

8,125.00

8,125.00

Indexed Cost of Acquisition

N.A.

N.A

1,10,250.00

Indexed Gain/ (Loss)

N.A.

8,125.00

(2,125.00)

Tax Rate ^

33.66%

11.22%

22.44%

Tax on Interest on FD/ Capital Gain on MF

2,734.88

911.63

–

Post Tax Income

5,390.13

7,213.38

8,125.00

Post Tax Rate(Simple Annualised)

4.98%

6.66%

7.50%

^ Assumed to be in the highest tax

bracket

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Benefit of investing in FMP in March: Say if you are investing for 13 Months in March you can use Double Indexation Benefit but if you are investing in April you will only be able to use single Indexation. This is applicable to all maturities over one year. Investing in March will bring your tax liability very low & net tax free returns very high.

New Direct Tax Code: It’s expected from 1st April 2011. According to this there will be changes in calculation of Indexation. Before investing, please consult us or your tax-planner on this aspect.

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How an FMP, different from a debt fund?

Investment in FMP is insulated from interest rate volatility unlike a normal debt fund. The bonds comprising the portfolio of an FMP is held till maturity and hence investors of the aforesaid plan earn the normal yield applicable without getting affected by any midway price fluctuations arising out of interest rate fluctuations.

What are the benefits of an FMP?

1) Minimal Risk: Debt funds, are exposed to three kinds of risks viz. interest rate risk, credit risk and liquidity risk. FMPs are designed to effectively minimize and in some case eliminate these risks.

Interest Rate Risk: FMPs are least exposed to interest rate risk as the fund manager holds the instruments till maturity getting a fixed rate of return like a normal FD.

Credit Risk: FMPs primarily invest in AAA or P1+ rated instruments with a short-term maturity profile from 3 months to 36 months and thus there are very low/ no credit risks.

Liquidity Risk: High credit quality automatically ensures high liquidity too.

This effectively means that investors can protect themselves from any capital loss on maturity.

2) Low Expenses: FMPs because of their very nature of holding the instrument till maturity, FMPs minimises expenses. Unlike a bond fund, there is no redemption pressure and as there is also no regular churning of the portfolio, this reduces costs incurred in buying these instruments and the fund managers cost of reviewing the portfolio on a regular basis.

3) Liquidity: Although FMP is best if held till maturity, but investors have an option to exit at any point as all FMPs are traded.

Please add Your Comments: Share your views about the article. Your comments will help us to write better in future.

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80 COMMENTS

    • Hi Rohit,

      FMPs keep coming from time to time – you should match your investment horizon with fixed maturity plan.

  2. Hi,

    Good article. Stands true even after almost one year. I understand that FMP’s are not supposed to declare even indicative returns, but how does an investor estimate likely returns? It becomes very difficult for an investor to differentiate FMPs when there are so many NFOs with similar maturity horizons and almost identical scheme objective. Please throw some light.

    Thanks.

    • Thanks Kinjal.

      Regarding your question – simple answer is we can’t estimate returns as now they are similar to any other debt funds with just one benefit that they don’t have interest rate risk if we hold FMP till maturity.

      But there are still 2 ways which can give some idea:
      1. Compare FMP maturity with some similar data available on other such securities.(not easily available to investors)
      2. AMCs are still sharing returns with distributors.(Yes you can get the numbers un-officially)

  3. DEAR SIR
    YOU R REALLY DOING A VERY GOOD WORK BY WRITING INVESTMENT RELATED ARTICLES.
    10 DAYS BEFORE 1 WAS HAVING VERY LITTLE KNOWLEDGE ABOUT SIP,ELSS AND OTHER FUNDS BUT NOW THANX TO YOUR ARTICLES THAT I FILL THAT THERE ARE VERY LITTLE CHANCE OF GETTING MISSELLED POLICY BY AGENTS.
    KEEP DOING THE GOOD WORK.
    CAN YOU WRITE A ARTICLE ABOUT WHAT SHOULD BE THE TYPES OF MUTUAL FUND (ELSS/BALANCED/RISKY/DEBT) AND HOW MANY IN A MIDDLE CLASS PERSON EARNING BETN RS 25000-50000/MTH.

    • Thanks a lot Paritosh for appreciating our effort. I will definitely write some article on suggested topics.

      Keep visiting TFL & sharing articles it with your friends. Knowledge increases by sharing. 🙂

  4. I read about FMP in this article. Thanks for sharing such a valuable knowledge to all of us.
    I thought of investing 10000 in “hdfc fmp 370d march 2011” , Is this a good option or should i go for another FMP ?
    one more question…
    For every FMP its written as NFO , So not understanding the difference between FMP and NFO , please clarify are they different and how to identify its FMP?

    • Hi Rajashri,

      You can for HDFC FMP but if you find some FMP which is going to mature after 1st April 2012 will be better.(due to double indexation benefit)

      FMPs are close ended funds so every time AMC have to bring NFO to raise money.

    • Hi Rajshree,

      Will write something on this soon – for time being just remember that if you are investing in debt funds(FMP) for more than 1 year opt for growth option.

  6. i want to invest 1,00,00,000 fmp in bank on tomorrow which will give 10.2% interest so maturity value is 1,10,20,000.. will i take this calculation for AY 11-12. and if it is loss can i set off with business income

    • Hi Rajesh,

      I think you are confusing FMP – “FMP in Bank” not possible. FMPs are compulsorily issued by Mutual Fund Companies & you will be having capital gain on them – no interest accrual.

      On bank deposits you will get interest & that is fully taxable.

  8. Hi Hemant, vry good articles by you….
    can you suggest some of FMP Mutual funds starting in April 2011.? as they do very less advertising on this so we cant come to know when they starts.
    is it better to invest more than 1 Yr in FMP?
    thanks

    • Hi Vijay,

      If we are comparing it with FD – definitely one should invest in FMPs. If you invest in march it will be more beneficial.(1 extra indexation year)

      You can directly call AMCs to share details about their present & future FMPs.

  9. One more Q, in Fd’s we get fixed returns dcleared, and in FMP, if the FMP not permofing well will i get the indicative returns mentioned or can it be less then mentioned?

    • Hi Vijay,

      In FMPs even you don’t get indicative yields – just you have to assume it on various factors.(which is not possible for investor)

  10. Very good article explaining the tax efficiency of FMPs vis a vis FD…however I request a clarification to my understanding

    FMP invests in securities/bonds. The income from these securities/bonds should be taxable to the FMP and therefore the gains to investor in FMP is post tax. Capital gains tax are added on top of this. As such ,the returns should be worse than FD.
    Tell me where I am going wrong
    Best regards
    Sirsendu

  11. hello,

    could you outline the difference between Certificate of Deposit (CD) and FMP for the following parameters – Liquidity/Taxation/Indexation/DDT with current scenario and post April 2011(w.e to new DTC). I shall highly appreciate the same.

    • Certificate of deposits are offered to investors by banks just like a normal deposits. But the difference is certificate of deposits are short term wholesale deposits and they are tradable.

  12. Hello Hemant,

    i would like to see your comments on this article please, link
    basically, i believe that whatever Shyam has said makes sense as well. How would you counter his point?

  13. Good article sir,one clarification for an FMP of April 2011,the double indexation benefit will be available for 370 days FMP as we have two finacial years?Please clarify

  14. can you tell me.now adays thereare some banks offering 10% interest rate what kind of returns i will get in FMP

    • Hi Hemant,

      SEBI has told Mutual Funds not to share indicative yields. But you can assume yields to be very close to or bit higher than FDs. But taxation make FMPs a better deal.

  15. Hi sir,
    I cam through your article, its clear and nicely projected. But i have a doubt here, i have invested 50 k in relaince FMP series 5 and 7 for 3 and 6 month as per my broker advice.

    but after seeing ur artcile i m getting a doubt
    should we go for FMP only for tax benefits? are the reliance 5,7 serioes fmps taxable , can i use it for 80 c deduction in my office? , i am confused , can you thwo some light on it.

    Can you also tell me which is best or which was the best FMP till date?

    • Hi Karthick,

      Let me fist clarify that you cannot use it for tax saving under section 80C.

      Now coming to your investment in FMP – if your horizon was 3 to 6 mths but if your horizon is 3-5 years you should match your horizon with horizon of the product.

      There is no best FMP – actually there is no way that we can compare FMPs. 🙁

  16. Hello Hemant
    First up, many thanks for so many simple yet very informative articles on your website. I have a couple of questions on this article though:

    1. I may not have understood the Indexation benefit correctly, but isn’t it that if we take a 13 month FMP during any time of the year, it will still extend into two financial years and will thus benefit from indexation? Wondering since your article mentions that it is a better idea to invest in March for indexation benefit.
    2. Please explain the Dividend Option and Growth option. Should we always opt for Growth Option considering the lower tax rate?

    Thanks
    Punit

    • Hi Punit,

      Great you noticed it – means you are serious about your investments.

      Regarding your 1st question – yes 13 months means you can take indexation benefit but that will be single indexation benefit. When you invest in march for 13 months – you can enjoy benefit of double indexation.(means almost tax free

      In debt funds one should go for growth option if horizon is more than 1 year.

      • Hi Hemant,

        What I could conclude from your article and this response is that to get 1 indexation benefit, your FMP should span 2 financial years, means it is invested in one FY and matures in other FY. But to get 2 indexation benefits, the FMP should span 3 FYs, means it is is invested in FY1, remains invested in FY2, and matures in FY3. This expalins why a 13 month FD invested in a month other than Mar will get only 1 indexation benefit. Is my understanding correct?

        Regards.

  18. Which FMP do u recommend me 2 invest Rs.7 lacs on 12-5-11 Sir? 1 person frm ICICI AMC suggestd ICICI FMP SERIES56- 1YR PLAN F-370days-Indicativ Yield: 9.25-9.5%p.a. NFO Last Dt.: 18-5-11. R ther any such comparabl plans? Pls reply asap,Thanx again Sir.

  19. Hemant,
    Good article and nice follow up with readers. Explains FMP quite holistically.
    In summary, it appears like FMP should be a good investment tool at end of the finaicial year to invest the last remaining money, considering the double indexation benifits.
    Would be good to see a follow up article once the impact of direct tax code becomes clear.

    • Yup Jaydeep – when DTC will come we may have series of articles explaining it’s implications.

  20. Hi Hemant,

    I had go-through your complete article and all the posted comments but still having some doubts.
    1. Compare to a bank FD will the return is higher in FMP.
    2. If the FMP not performed well. In that case is there any chance that the amount I had invested will decrease at the time of withdrawl.
    3. As you have a great experience of it have you ever seen that the investment in FMP will not return good result in time of more then 2 yrs. What my concern is, just to know that if i invest a lumsum amount of 100000 will i get much benefit compare to a FD of 3yrs in bank.

    What you will suggest should we go for FMP or FD. Because here iam unable to take decision.

    Rgds,
    Munish K. singh

  21. Hey Hemant,

    Of late I have been doing some research on FMP as a new tool of investment as I am already invested in MF, Stocks, ULIP (not a great tool though) and FD.

    I have a few questions for which I couldn’t find answers . If you can provide any insight into these points it would be simply great!

    1. Now that the interest rates are at the peak. May be one more round of increase would be there. So, in this scenario is it the right time to invest in FMPs?

    2. What is the provision for FMP in new DTC? Will a 1 year FMP be more beneficial or a 2 year FMP at this point in time keeping DTC in mind?

    Thanks
    Lakhwant

  22. i would like to buy a FMP with double indexation in 2012.
    So can you give me the company name on which i could rely on…

  24. Hi Hemant!

    In case of the person whose income doesn’t cross the tax limit, what will be the better option for long period of time ie+3 years.

  25. Hi Hemant,

    I wanted to ask that i have a demat account with ICICIdirect and carry out my SIP transactions through the same. If i start a FMP through ICICIdirect, i’ll have to pay brokerage for it, which is around 1.6% i guess. That already takes some part away from the investment. Please suggest me something on this. Should i invest in the FMPs by some other means?

  26. I must admit this is a very well researched and well written comparison of FMPs vis-a vis Bank Fds. Very useful for investors who are in a dilemma as to which will be the best investment option that suits their investment needs. Keep up the good work, All the best!

  27. I really like this article.

    However, since I’m new to this indexation etc, I could not understand the calculations of Indexed Cost of Aquisition (1,10,250). Can you please help me understand?

    Can you also please explain about tax implications for Dividend options of FMP for less than 1 year (and may be more than 1 year also)?

  28. Dear Hemant,
    Can you please clarify one aspect about impact of proposed DTC on FMP returns and that is FMPs wtih dividend option. Will the dividends on FMPs continue to be tax free in the hands of the investor even in DTC regime? If it is so, then even after parting with the near 15% dividend distribution tax, investors in 30.1% tax slab may benefit themselves through dividend FMPs till they align themselves with FMPs of proper duration and time slot so as to avail single or doule indexation.

    • Hi Hemant,
      It looks that even after DTC, investing in FMPs will make sense.
      On dividend side there are no changes but indexation benefit will be reduced by 1 year.

  29. Hi Hemantji
    I have to invest Rs. 40000.00 for tax saving purpose. Pls suggest me the best product available in the market, like FMP , ELSS, FD etc. Lock-in period is maximum 5 years.
    Thanking you

  30. Is it a good idea to invest in FMPs before 31 March, 2012 inspite of what is there in Budget/expected DTC? The same reasons hold good now also.

    Are there any good FMPs in the market presently where we can invest before 31st March. Is HDFC the best of lot?

  31. i want to know if i am investing rupees 100000 in jeevan vridhi policy then how much sum i will guaranteed get back

  32. please suggest a pension plan and give clear calculations like how much investment amount and how much pention will be available also with years
    my age is 33 years

  33. I have some questions reg FMP.
    HDFC has new FMP which opens on 30Mar12 and closes on 3Apr12. If I apply for it on 30Mar12, will it help me get benefit of double indexation. Whether the date of application is to be taken for computation of tax or date of closing of offer or date of allotment.

  34. hi hemant
    I was very confused about FMP but got some idea about this from yout articles and and some related reply. perhaps it is not for small investors and second if small investor choose to go fmp bia web like icicidirect one cannot fetch even general return as commission of such typae of potals is very high. thankyou

  35. Hi
    I just wanted to share my experience of today.
    I asked one of the CA(s) in our office that where from I can invest in FMP.
    The reply was, ” FD(s) are available with all banks and post offices.”
    To which I said, ” Sir, FD & FMP are different”. He said, ” No madam. You may use different terms but there is no difference in these two words.”

    Now I thank God I came accross this website as I fully understand that even a Chartered Accountant is not wise enough to seek financial advise. 🙂

    But my question is still unanswered so please guide Hemant.

    Regards,
    Nishi

  37. One can invest in FMPs through mutual funds either (i) online from their website if you alreday have registered form the same or (ii) by submission of paper application form to their offices. Alternatively, you can get registered for some portal like fundsindia etc which offer a common investment platform for many mutual funds without charging any fees.
    For details of FMPs being launched from time to time, you can visit http://www.amfiindia.com/nfo.aspx for a listing of FMP NFOs being launched.
    I hope this anwers the query.
    Hemant

  38. Hi

    Its a great article, just want to know 2 things:

    1. Does making investments in the middle of the year in FMPs for tenure more than 12 months makes sense?
    2. If yes, then how to identify good FMPs and can u suggest some of them already available in the market?

    • Dear Varun,

      You should look FMPs as investment avenues for specific period.Whether you invest in beginning of year or at middle of the years should not be a concern.It should meet your desired objective.
      You need to look at previous FMPs and their portfolio. The composition tells you where is the company taking exposure. Some FMPs invest in low rated securities too to boot the yield from the product.

  39. I have a question. How do we account FMP while filing IT returns. Are the online tax filing websites smart enough to handle tax on FMPs in a manner different from fixed deposits. If we mention FMP interest earned simply as fixed deposits during online tax filing, we will not get taxation benefit and I’m not sure if tax websites allow to enter FMPs separately and treat these separately.

    • Dear Rajesh,

      Any gains in FMPs is counted as capital gains which is taxed seperately. In all ITR you have provision for showing capital gains income from equity,Debt ,real estate or gold. Hence there will be no problem when you are filing ITR.

  41. Sir,
    I am a resident Indian.I know that the FD interest of many other countries are very high (up to 25%). May I invest in any way or through any investment vehicle to those fixed deposits?

  42. Dear Sir ,
    I am put some money in the FMP in 1 April 2014 ans its Maturity is come on 1 April 2017 A mount i am invested is RS 5 Lacs & MAturity Amount is 656466.187, What is the TAX CALCULATION, Please reply on my Email.

    • Hi kirtidhwaj,
      There will be 10% tax on capital gain(without indexation) or 20% tax on capital gain (with indexation).

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