Understanding the different investment options
Fixed Deposit (FD)
An FD is an investment option offered by lenders, which provides higher interest than a savings account and comes with a predetermined maturity date. It contains a lock-in period but allows for liquidity during times of need or emergency.
Fixed Maturity Plan (FMP)
An FMP is a close-ended debt mutual fund. As an FMP has a definite maturity date, it invests in only those financial instruments that have a similar duration to its term.
Debt Fund (DF)
A Debt Fund is a part of a pool of investment—similar to an exchange-traded or mutual fund—where most of the holdings are fixed-income investments. A debt fund can comprise short-term or long-term bonds, money market instruments, securitised products, and floating rate debt.
Comparison based on what investors look for
Here are the differentiating characteristics of the three types:
1. Return on Investment
FD: Here, the rate of return is predetermined when starting the FD account with the lender, so you are sure of the amount you will receive on maturity. You can use an FD calculator to make it simplify the process.
FMP: The returns are not fixed and are subject to market risks.
DF: The return of investment is not assured, and any change in the market situation will change the fund's net asset value (NAV).
FD: Most lenders allow premature withdrawal of the fixed deposit accounts before the date of maturity. The interest will be calculated based on the number of days the fixed deposit was with the lender. However, some financial companies can charge you an early withdrawal penalty.
FMP: In this financial investment option, the money invested is locked-in for the plan's duration.
DF: The units of debt funds held can be liquidated in the market at any time and money realised, typically in just one day.
FD: The interest earned on a fixed deposit will be taxed as income earned during the financial year. Further, if the fixed deposit interest income is over Rs. 10,000 in a financial year, the lender will deduct a TDS of 10%.
FMP: The short-term (less than three years) capital gain from a fixed maturity plan is calculated as income earned and is taxed as applicable during the financial year.
DF: The taxation for debt funds is similar to a fixed maturity plan with short term gains facing the total income tax charge.
4. Safety of Returns
FD: The fixed deposit interest rate is predetermined and guaranteed.
FMP: The returns are not guaranteed and vary depending on market fluctuations.
DF: There is no guarantee of the returns as it depends on market fluctuations. In fact, in some instances, the principle amount can also be eroded.
Thus, the fixed deposit scheme is efficient and offers the best security for your investment, allowing you liquidity flexibility. In fact, with mobile apps and internet banking, it is no longer necessary to visit the bank branch to liquidate or even start the FD account.
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