New investors always like to play safe. For that they prefer to invest there money in such plans which offers guaranteed returns. This is the prime reason most of the people use bank fixed deposits(FD) as a mean of investment for their surplus money. Likewise people investing in stock market prefer to invest in Fixed maturity plan. Quite often for investors ‘Fixed Maturity Plans’ and ‘Fixed Deposit ‘are alike but there are some distinct differences between the two term.
Fixed Maturity Plan (FMP)
Fixed Maturity Plan(FMPs), are closed ended debt based schemes (Where you can only invest in during the NFO, and redeem them only on maturity) offered by mutual funds which terminates on a pre determined date. Which means investors can not withdraw their investments before the maturity date. FMPs are ideal for those investors who wish to lock their invests for a specific period of time. The funds invested in FMPs are tax efficient and normally offer favorable returns. The return of these schemes are predictable as money is investing in fixed interest based securities. Like other mutual funds FMPs are listed in the exchange so investors can sell their units in the exchange on or after maturity date. Tenure or maturity of FMPs ranges for 1 month to even more than 5 years. In simple words, FMP schemes are safe alternative to liquid mutual funds, with better returns and more tax friendly policies.
Fixed Deposit (FDs)
The term ‘fixed deposit’ refers to an investment method where you can deposit money in a bank or financial institution to earn interest on your investment. It is called ‘fixed deposit’ because the investment period is fixed at start of the investment. A fixed deposit is considered to be the safest and secure form of investment. Funds placed in a Fixed Deposit usually cannot be withdrawn prior to maturity or they can perhaps only be withdrawn with advanced notice and/or by having a penalty assessed.
Difference Between Fixed Maturity Plan And Fixed Deposit
- FMPs are issued and managed by mutual funds while bank fixed deposits are managed by banks
- While bank fixed deposits (FDs) are deposits in bank debt instruments, FMPs are debt instruments managed by mutual funds in typically Gov. backed securities, and corporate fixed deposits.
- FMPs typically offer an “expected” rate of return, while the bank fixed deposits have a fixed rate of return
- FMPs offer better post tax returns than bank fixed deposits (FDs)
- FMPs are potentially marginally riskier compared to bank FDs
- FMPs returns are not guaranteed whereas fixed deposits offers guaranteed return on investment.
- Pre mature withdrawal is generally not possible in FMPs whereas in fixed deposit you are allowed to withdraw you funds before maturity with penalty.
- Interest on Bank FDs gets taxed at the highest rate at which the individual/assesse pays tax whereas the return from FMPs are lower than the income tax rate applicable on Fixed Deposits.