The cycle of debt and equity instruments are at work again. The bank fixed deposit rates are rising once again and people are reportedly flocking back to saving avenues from small savings schemes which are about 2% less than commercial /scheduled bank rates.
Investors are also being offered fixed maturity plans (FMP’s) by allmost all fund houses. This is a mutual fund which can NOT be redeemed until the expiration of the term and hence locks up the funds of tenures offereing good/decent returns. Some are touting this instrument and this post is to clear up the differences between both the bank fixed deposits and mutual fund house FMP’s.
- Most of them can not be broken, you can not take loans and depending on the AMC, there may be steep exit loads for window period ( time when the AMC is ready to buy back units) too.
- You tend to get decent returns about 1% or 2% compared to bank FD’s but have the potential to do better.
- Since the AMC already pays 14%++ tax to government, depending on the holding you need to pay 10% one time or index it over time. Talk to your advisor about indexing option.
- You have the RISK of loosing money here.
- Very much like bank FD’s, there are tenures from 30 days to 3 years!
- Most AMC prefer this due to SEBI guidelines which state the AMC can NOT collect fat commissions on New fund offers for open type – so the fraud occurs through back door of FMP’s – unless its suited for the customer.
- Suggested currently for people to park money for short terms falling in highest tax bracket.
Bank Fixed Deposits
- There is no RISK involved in losing principle if its in a scheduled bank. In other banks, your principle is gauranteed only upto 1 Lakh INR provided the bank has taken insurance for the same. The net total will include all monies from savings bank and fixed deposits. Beware of this!!
- Suggested for people with lower tax brackets at current scenario.
- Taxation is done at your levels and could range from 10% to 30%++.
- Nomination is very important. Ideally a joint account is suggested as in case of death of primary holder, the nomination does not hold much water over a will.
The reason why FMP is touted is that its post tax returns are good compared to FD’s but Risk in both cases need to be considered.