Why FMPs score over bank fixed deposits?

Q. Why FMPs score over bank FDs?

A: We are all familiar with what bank FD is, because all of us have invested in FDs in some point or the other. Fixed Maturity Plans (FMP) are mutual fund product and they are akin to a fixed deposit, that is because they are closed-ended scheme by nature, they have a fixed duration. It could be 1 month, 3 months, 6 months, 12 months, 24 months, 36 months or even 60 months. So these are essentially closed-ended fund.

Why they score over FD is because they are mutual fund product and mutual fund as investment vehicle is more tax efficient. Let us understand that with an example. If you are in 30 percent tax bracket and you get Rs 10,000 interest which is 10 percent on Rs 1 lakh you end up paying 30 percent tax. So your post-tax return is Rs 7,000 from a fixed deposit.

If you get the same amount from a FMP assuming that the rate of return is same you would get Rs 10,000 and because it is redeemed after one year it becomes a long-term capital gain, which means that your capital gains are taxed at the rate of 10 percent, you end up paying a flat rate tax of Rs 1,000. Your post-tax returns are gong to be Rs 9,000 which is much higher than what we have got from FD.

In higher inflation rate scenario go for indexation which means that if the inflation is 7 percent, your net return is 3 percent you pay 20 percent tax on that which is 0.6 percent, so your post tax return again is going to be 9.4. So as you can see that because of the tax efficiency FMPs score over FDs and also remember FMPs in a higher interest rate scenario have the potential to give you much higher return than what a bank can give you.