If you can compromise on liquidity, go for fixed maturity plans over FDs
11-Dec-2013 •Research Desk
I want to invest some money for safe and fixed returns. Where can I get returns better than a fixed deposit?
If you're looking for reasonably safe returns and could compromise on liquidity, Fixed Maturity Plans (FMP) are a good choice. Once you invest in these funds, your money gets locked in for the term of the plan. But the advantage is that you get returns slightly better than a fixed deposit.
For those in the highest income tax bracket of 30 per cent, the effective post-tax rate of return from fixed deposits in the last one year was 6.3 per cent. In comparison, a typical FMP for the same period earned a return of 9.51 per cent. After adjusting the investment cost for inflation to calculate the indexation benefit, the returns from FMPs become tax-free as the rate of inflation is higher than the rate of return.
But there's a catch. Unlike bank fixed deposits, there is no practical way to get a premature redemption in an FMP, although on the face of it FMPs work much like a fixed deposit. You invest in an FMP that is launched for a fixed period of time. Generally, options range from 12 to 36 months. When the said period is over, the fund redeems your money with the returns. However, unlike a bank fixed deposit, the fund company has no option for an early redemption.
Theoretically, all FMPs are listed on the stock markets and if you need your money early, you have the option to sell it to another investor. But that is easier said than done. In practice, volumes are thin to being non-existent and you probably will never be able to sell.
What is clear from this is that one should invest only that amount one is absolutely certain that will not be needed in the interim period.