FD, FMP or Debt Fund - Which is the best investment option?
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FD, FMP or Debt Fund - Which is the best investment option?

  • Highlights

  • Pros and cons of Fixed Maturity Plan investments, Fixed Deposits and Debt Funds

  • Assured returns with FD for risk-averse investors

  • Investment options influenced by market forces



Fixed Deposits, Fixed Maturity Plan investments, and Debt Funds are popular investment options that must be chosen on the basis of your requirements.

Understanding the different investment options


Fixed Deposit [FD]:

An FD is an investment option offered by lenders, which offers a higher interest as compared to 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]:

A FMP is a close-ended debt mutual fund. As an FMP has a definite date of maturity, it invests in only those financial instruments that have a similar duration to its own term.

Debt Fund:

A Debt Fund is a part of a pool of investment—similar to an exchange-traded or mutual fund—where a majority of the holdings are fixed income investments. A debt fund can comprise of short term or long term bonds, money market instruments, securitized products, and floating rate debt. .

A comparison based on what investors look for

Now that the definitions are clear, 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 that you will receive on maturity. You can use 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 situations
will change the net asset value [NAV] of the fund.

2.Liquidity
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 for which 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 duration of the plan.
DF: The units of debt funds held can be liquidated in the market at any time and money realised, typically in just one day.

3.Taxation
FD: The interest earned on a fixed deposit will be taxed as income earned during the financial year. Further, in case the fixed deposit interest income is over Rs.10,000 in a financial year, a TDS of 10% will be deducted by the lender.
FMP: The short-term [less than three years] capital gain from a fixed maturity plan is calculated as income earned and taxed as applicable during the financial year.
DF: The taxation for debt funds is similar to fixed maturity plan with short term gains facing the full 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 certain cases, the principle can also be eroded.

Fixed Deposit Senior Citizen Benefits

 

From the above insights, it is clear that fixed deposit scheme is the most efficient,
offering the best security for your investment and allowing you the flexibility of liquidity. In fact, with
mobile apps and internet banking, it is no longer even necessary to visit the bank branch to
liquidate or even start the FD account.
 

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