FD vs FMP (Fixed Deposit vs Fixed Maturity Plan)

Yes, I guess some of you find these finance posts quite irrelevantly boring. However, there are some souls who have sent me encouraging mails and it is for them that I have not given up.

 

This post could be particularly helpful for all those in the Income Tax Slab of 30%.

 

It is always better to gather knowledge about money. Remember when we work so hard to earn money we must also ensure our money works as hard as us. Optimal Money Management will always ensure you will have more money in the bank and probably a better and early retirement.

 

Anyways, enough of rambling, lets get to the point.

 

First and foremost it is March, financial year end for India and it is raining FMP’s. Let us first explain what are FMP’s.

 

FMP’s are Fixed Maturity Plans are close ended funds that invest in debt and money market instruments and have a fixed maturity period as stated in the offer document. The main aim of a FMP is to provide a income through interest on debt while giving the investor a very low level of risk. ( more details are here : http://www.fixedmaturityplans.com/whatare-fixedmaturityplans-fmps )

 

I have tried my level best to simply things for my readers.

 

Assume

Rate of Interest on FD : 9.25%

Yield on FMP : 9.25%

Indexation (Inflation rate ) : 6%

 

Now sample this, when you invest in an FD of say 9.25% and you happen to be in Income Tax(IT) slab of 30% your post tax yield will be very less.

If Interest is 9.25% on an FD the in hand yield post income tax for a person in 30% IT slab is about 6.11%.

 

However, if the same person invests in a normal FMP with a yield of 9.25% he will have to probably pay a Capital Gain Tax @10% & his post tax yield will still be 8.20% in his hand.

 

And then there are FMP’s that come in March every year with an added advantage of Double Indexation. So if you buy an FMP in march that is for 13 months your yield post tax will be 8.41%.

 

We have assumed indexation at 6% however inflation has been much higher this year so the indexation rate may be higher and in FMP’s with double indexation, perhaps there will be no tax liability at all this year.

 

That is the reason for this post, this is an ideal time to invest in FMP’s with such tax advantages and interest rates set to fall this year

 

The table below might help you understand it more easily.

 

The only tricky thing when you are buying an FMP is that the yield is not as clearly mentioned as in FD’s. However, generally their low tax liability ensures that people in 30% IT Slab will always go for FMP’s compared to Fixed Deposits. Good Fund houses rarely compromise on the quality of paper and FMP’s are pretty safe.

 

 

Folks your feedback, questions, queries are most welcome