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Saturday, January 1, 2011

FMP's Better than Bank FD's

Fixed Maturity Plans are being offered by various banks now a days, So what are these FMP's ?

A Fixed Maturity Plans (FMP) is that instrument which invests in bank Certificates of Deposits (CD) & which are compared with bank FDs & a FMP that invests in corporate debt are compared with fixed deposits of corporates of similar rating of credit.
FMP's also invests in Debt & money market  instruments- typically AAA rate corporate bonds. The tenure's are around One year & almost 100 % of their funds are invested in Commercial paper (CP) & CD's. These CP's & CD's rates tend to shoot up in a raising interest rates regime, making FMP investment more attractive. Fund managers of  FMP's does not need to Buy/Sell the instrument on continuous basis, which means low management fees.

FMP's have a minimum investment of Rs 5000. Capital gains on FMP will be short term capital if hold for less than 1 year and at short term capital tax rate, which is clubbed to your income for that year and taxed according to the tax bracket you fall in. If you hold for more than 1 year than long term capital gain tax will be applicable
Whereas in FD's the tax on income is based on the tax slab the investor is in (which can be as high as 31%) the investor can earn tax free dividends (subject to dividend distribution tax of 14 % for retail investors & for corporates 22 %). So if you are in top tax bracket then the capital gain on that FMP will be taxed accordingly. Indexation method will apply to FMP's if holded over a year. So I would prefer to go for 2 year FMP rather than 1 year as they give better tax adjusted returns.


  1. FMPs are anyday more tax efficient in comparison to Bank Fds , specially in the long horizon due to the double indexation benefits. But one cannot afford to ignore other aspects like-liquidity(as it is difficult to come out of an FMP..premature withdrawal penalty charges are very high compared to bak Fd) also Bank FDs are more safer considering there is less credit risk.
    On the other hand, if u r someone with low taxable income, u anyways dont need FMP.FMPs in short are good for people falling in higher tax bracket,who dont need liquidity as much, and who are willing to take little more risk for slightly higher returns.


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