With falling rates of fixed deposits (FDs), investors should explore alternative investment avenues.
With falling rates of fixed deposits (FDs), investors should explore alternative investment avenues. There are several fixed income products available in the market, experts say, which can be considered in place of FDs in the current scenario.
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For those who are not worried about liquidity, fixed maturity plans (FMP) can be a good option.
FMPs are the fixed deposit version of mutual fund industry, which are close-ended in nature.
"The fund house comes up with a New Fund Offer (NFO) which has an opening date and a closing date. One can invest in an NFO only when it is available for subscription. After the closing date, the offer to invest ceases to exist," according to ClearTax.
Being a debt instrument, FMPs and FDs are similar in many ways. Both require investors to stay invested for a fixed duration and both of them are available in varying maturities.
Historical data, experts say, however provides evidence on how FMPs have performed better than bank FDs in a falling interest rate scenario.
Since FDs are by definition a liability for the bank issuing the FD, an investor parking assets in an FD is also exposed to the credit-risk of the bank within the context of deposit insurance (Rs 5 lakh).
“FMPs, on the other hand, can invest in debt instruments of different issuers with the same tenor and maturity,” explains Siddharth Panjwani, chief strategy officer, Pickright Technologies.
“As long as these instruments are investing in good quality commercial paper and other low-risk debt instruments, FMPs can offer diversified exposure to an investor parking assets while offering a similar risk/ reward profile as an FD,” he adds.
The biggest benefit that FMP can provide however is that of taxation.
"FMP enjoys benefit of indexation if maturity period is over three years while calculating tax out of return earned. On the other hand, FD has no relation with its holding period and interest earned gets added to the income and is taxed as per the tax slab of the investor," explains Palka Chopra, senior vice president, Master Capital Services.
Nevertheless, there are certain risks also associated with FMPs which an investor must be aware of.
If the profile of the scheme portfolio is poor, there is a chance of default in some securities. This could potentially hamper their returns. They are also exposed to 'reinvestment risk' - that is, the risk that the fund manager will need to reinvest maturity proceeds at a lower than earlier rate.
Being said that, one should not blindly invest in any scheme based on any indicative yield, say experts.
(Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.)
First Published: IST