Introduction
Indian investors have traditionally been low-risk-appetite investors. They do not mind sacrificing high returns for the sake of low risk. And, when it comes to getting assured returns at low risk, fixed deposits are the clear winner. However, of late, investors are showing interest in another financial instrument, which is offered by mutual fund houses, fixed maturity plans.
So, which one would fetch you higher returns? Scroll down to find out the differences between FDs and Fixed Maturity Plans and take the right decision.
What is a Fixed Deposit?
Fixed Deposit, or FD, is a fixed-term financial instrument issued by deposit-taking financial institutions. PNB Housing Finance, for example, gives the best FD rates and allows you to invest for any time-frame between 12 months and 120 months.
What is Fixed Maturity Plan?
A fixed maturity plan, or FMP, is a closed-end deposit account that primarily invests in the debt market. Mutual fund houses manage fixed maturity plans. Generally, it has a lock-in period between three years and seven years. Unlike the PNB Housing Finance FD, which allows you to invest any time you wish to, you may invest in an FMP only during the New Fund Offer (NFO) period.
Fixed Deposit and Fixed Maturity Plan – The Differences
Although both FD and FMP are similar in their purpose, they are way different in their approach. Here are the things which make FD and FMP different.
1. Ease of Account Opening
The FD account opening process is relatively simple. Many financial institutions, like PNB Housing Finance, offers you the facility to open an FD, 24×7, 365 days a year. On the contrary, to open an FMP, you have to keep an eye on NFOs and open the account before the cut-off date.
Hence, if you have surplus cash in your hand that you don’t want to put in a low-interest savings account, an FD might suit you more, as you can open the FD account whenever you want to and let your money grow from Day-1 itself.
2. Uniformity in Interest Rate
FDs can be cumulative or non-cumulative. In the cumulative option, you can get the maturity proceeds as a lump sum. For the non-cumulative option, interest is paid at periodic intervals. Whichever option you select, the amount you will get from an FD will remain fixed.
In an FMP, however, the fund house will publish an indicative yield that may or may not remain the same when the FMP matures. If you are saving with a goal, then this uncertainty in returns might not be right for you.
3. Liquidity
You never know when you would require funds urgently. Generally, people prefer to use their existing funds to meet an urgent requirement before applying for a loan. In this respect, FDs offer the facility to close your account prematurely, by paying a nominal fee.
FMPs, on the other hand, cannot be closed before the end of the term, under any circumstances. Hence, if you have enough liquid funds to take care of emergencies, then you may opt for an FMP. If, however, you are investing your entire capital, then choosing an FD would make more sense.
Conclusion
If you are a risk-averse investor, then investing in PNB Housing Finance’s CRISIL FAAA-rated FDs can be a better option for you. PNB Housing offers the best FD rates, with up to 10.32% yield. If, however, you do not mind taking the extra risk to get higher returns, then FMP can be a better option.