FMPs safer than Company FDs - Know How?

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At a time when the bond market is showing extreme volatility due to Reserve Bank of India's recent decisions to indirectly raise the rate of interest, bond funds are also in an uncertain territory. In some cases, bond funds have also given negative returns. In such a situation, investors would be better off being invested in fixed maturity plans (FMPs). Compared to most bond funds, at least these type of funds are giving surety of returns.

Last week, the indicative returns from FMPs were about 9.80% per annum. At the time of redemptions, investors in FMPs can expect a return which is around this rate. The final rate could be only slightly here and there, but not much.

Investors investing in FMPs should keep in mind that these products offer less liquidity than most of its comparable products, because once invested they rarely get a chance to exit before the time of maturity which is pre-set at the time of investment itself. So while investing in these funds, investors should have certain time horizon in mind and then invest.

Since FMPs also offer better tax-adjusted returns, so these funds are very useful investment tools for those investors who are in the highest tax bracket, that is who pay taxes at the rate of about 33%. Here in case the investments are in FMPs with maturity of 367 days or more, they can take advantage of the long term capital gains tax and pay taxes at a lower rate.

In terms of safety, FMPs are much safer than company fixed deposits (FDs). One of the main reasons here is that if one invests in FMPs, and that plan in turn invests in certificates of deposits (CDs) and commercial papers (CPs) of a large number of entities, then automatically the combined risks associated with the plan is distributed and hence becomes much lower. On the other hand if a person invests in FDs of one or two companies, the risks associated with those investments are much higher. So the chances of losing money in FMPs are much less than the chances of losing money in FDs.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

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