FMP Vs FD

Bank Fixed Deposits : A safe haven OR ??

One of the easiest and safest ways to invest your savings is the bank fixed deposits. The banks offer a facility to create an FD for different durations starting from 15 days and beyond. Infact one can create an FD through net banking from the comfort of our homes, the interest and principal being credited automatically to our savings accounts. Plus we have the added and maybe the main benefit that the investment is risk free. Under no circumstance would our principal be eroded.
And more over till the last year, the interest on the FD was exempt from taxes up-to Rs. 12000/.

However from the financial year 2006-07 that exemption stands withdrawn, hence the entire FD interest is taxable. If one falls in the highest tax bracket, the tax is 33.33%.

In my opinion and I am sure most of us will agree that saving the tax liability is as important as intelligent saving. More so when the highest tax rate is 33.33%, its safe to say that if one can reduce the tax liability, one has invested intelligently.

Compared to the FD, there are certain debt oriented schemes called fixed maturity plans (FMPs) which are a better option.
Let me explain, various asset management companies (AMC) like Kotak, Birla, Reliance, HDFC come up with schemes (some what similar to the mutual funds) which are debt oriented. I.e. instead of investing in the shares, these schemes invest in Debentures and similar instruments. In finance parlance, they invest in the money market/debt market instruments and government securities. The AMCs generally invest in AAA rated companies (the best). Hence they are more or less risk free. The returns are in the form of interest payable at the end of the maturity of the scheme.
However, these FMPs don’t come with an assured return. The schemes announce an indicative yield. The actuals may differ compared to the indicative yield.

Further these FMPs are for different periods, ranging from 1-3 mths to more than a year. Hence they do offer flexibility in duration.

The key benefit is the taxation of the interest on the maturity of the scheme. The interest is taxed @ the rate of 11.22% in the hands of the individual investor. Hence this is a key benefit as compared to the FD. All things being equal, even if the interest rate on FD is the same as that on an FMP, post tax returns on the FMP outweigh the returns on the FD. Hence when compared to the Bank FD, I would recommend FMPs as an investment Option.