Fixed Deposits as popular investment option
Monday, October 11, 2010
Fixed Deposits as popular investment option
Fixed Deposits (FDs) have always been a very popular investment option. Safe, secure and good returns - these features have worked in favor of FDs making them a 'must have' in everyone's investment portfolio.
However, with the rising popularity of mutual funds and investors seeking high returns, FDs seemed to have lost their charm amongst savvy investors. Low interest rate on FDs was a major factor contributing to the reason that investors started looking out for other options. Recently though, interest rates on FDs are on a rise and investors are again considering investing more in FDs.
Difference between fixed maturity plan and fixed deposit?
Fixed maturity plans, or FMPs, are schemes floated by mutual funds and they work almost like a bank fixed deposit (FD). They come with different maturities like three months, six months, one and two years and rarely for three years.
FMPs invest in instruments of matching maturity and this gives investors a rough idea about the likely returns you can hope to pocket at the time of subscription. Since the portfolio is locked, investors are also shielded against interest-rate risks.
Also, FMPs with a maturity of over one year have a tax advantage over fixed deposits. Investors in FMPs have an option to pay tax on long-term capital gains at 10% without applying indexation or 20% after applying indexation to the cost of acquisition.
Interest from FDs is taxed according to the tax bracket applicable to the person. However, don’t go by the post-tax returns alone, as unlike bank FDs, FMPs do not offer assured return or capital protection.
If you plan to invest in FMPs, always look at the reputation of the fund house. This is very important because during the economic downturn two years ago, many fund houses got into trouble as they invested in low-rated papers from dubious companies, especially in the real estate sector. They just about managed to come out unscathed because of timely regulatory intervention and support.
However, the tricky thing about investing FMPs these days is you neither have an indicative portfolio nor return. So everything hinges on the integrity of the fund house.
Though an investor is supposed to stay invested till maturity in FMPs, fund houses also list FMP on stock exchanges so that investors can exit if they need money urgently. However, this does not guarantee enough liquidity and attractive price.
In short, consider investing in FMPs if you are comfortable with the concept and want to take a little risk to make superior tax-efficient returns.
Fixed Deposits (FDs) have always been a very popular investment option. Safe, secure and good returns - these features have worked in favor of FDs making them a 'must have' in everyone's investment portfolio.
However, with the rising popularity of mutual funds and investors seeking high returns, FDs seemed to have lost their charm amongst savvy investors. Low interest rate on FDs was a major factor contributing to the reason that investors started looking out for other options. Recently though, interest rates on FDs are on a rise and investors are again considering investing more in FDs.
Difference between fixed maturity plan and fixed deposit?
Fixed maturity plans, or FMPs, are schemes floated by mutual funds and they work almost like a bank fixed deposit (FD). They come with different maturities like three months, six months, one and two years and rarely for three years.
FMPs invest in instruments of matching maturity and this gives investors a rough idea about the likely returns you can hope to pocket at the time of subscription. Since the portfolio is locked, investors are also shielded against interest-rate risks.
Also, FMPs with a maturity of over one year have a tax advantage over fixed deposits. Investors in FMPs have an option to pay tax on long-term capital gains at 10% without applying indexation or 20% after applying indexation to the cost of acquisition.
Interest from FDs is taxed according to the tax bracket applicable to the person. However, don’t go by the post-tax returns alone, as unlike bank FDs, FMPs do not offer assured return or capital protection.
If you plan to invest in FMPs, always look at the reputation of the fund house. This is very important because during the economic downturn two years ago, many fund houses got into trouble as they invested in low-rated papers from dubious companies, especially in the real estate sector. They just about managed to come out unscathed because of timely regulatory intervention and support.
However, the tricky thing about investing FMPs these days is you neither have an indicative portfolio nor return. So everything hinges on the integrity of the fund house.
Though an investor is supposed to stay invested till maturity in FMPs, fund houses also list FMP on stock exchanges so that investors can exit if they need money urgently. However, this does not guarantee enough liquidity and attractive price.
In short, consider investing in FMPs if you are comfortable with the concept and want to take a little risk to make superior tax-efficient returns.
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