FMP Vs FD: Where to invest?

With the stock markets on a decline FMPs have emerged as a popular investment option for retail investors. FMP's are essentially closed ended debt funds with fixed maturity offering indicative yield. Due to their tax efficient status they are being marketed as an alternative to Bank Fixed deposits (FD's). Several FMP schemes launched by various Fund houses have mopped up over Rs. 44,000 crores in the year 2008. The tenure of FMP starts from 3 months and the minimum investment amount is Rs. 5000.

How do FMP's compare with FD's?

• The investment depends upon the risk profile of the investor. While FMPs may appeal to investors willing to take a little risk for that extra return; FDs will find favour with investors who are satisfied with a lower but assured return. This is because FMP's do not offer an assured return (the return mentioned is only indicative).
• For investors in highest tax bracket FMP's are more tax efficient. In FDs, the interest income is added to the investor's income and is taxable at the applicable tax slab (or the marginal rate of tax).
  As far as FMPs are concerned, the tax implication depends upon the investment option -- dividend or growth. In the dividend option, investors have to bear the Dividend Distribution Tax. Whereas in the growth option, returns earned are treated as capital gains (short-term or long-term depending on the investment tenure). In the case of short-term capital gains (i.e. if investments are held for less than 365 days), the interest income is added to the investor's income and is taxed at the marginal rate of tax.
  As for long-term capital gains (if investments are held for more than 365 days), the tax liability is computed using two methods i.e. with indexation (charged at 20 per cent plus surcharge) and without indexation (charged at 10 per cent plus surcharge); the tax liability will be the lower of the two.
• The liquidity aspect tilts the balance in favour of FD's. Bank FD's can be instantly encashed any time by paying a 0.5% foreclosure charge. Easy loans are also available against FD's. Banks these days offer attractive two-in-one accounts where Fd's can be switches to liquid deposits (Savings/ Current accounts) and vice versa. Premature payment on FMp's may still take a few days to realise. FD's thus come in handy in case of emergencies.

The investors can make their choice after considering the above mentioned facts. Ofcourse, please read the offer document carefully before investing!