Is Fixed Maturity Plan better than FD?

It just may be your last chance to get more than 10% on your fixed deposits as many banks are windng up their schemes on March 31. But CNBC-TV18 reports that even if you have missed these schemes, there are better options from mutual funds.

Just three more days for depositors to get that 10% interest rate on fixed deposits! PSU Banks like Canara, Bank of Baroda, Bank of India, SBI and Union Bank have all higer deposit rates to attract depositors, but only for a limited period - till March 31. Foreign and private banks are also willing to pay interest rates up to 20%, but only for bulk deposits over Rs 1 crore.

Financial planners say they are advising clients to reinvest their existing FDs for better returns. Surjit Mishra, Senior VP, Bajaj Capital says, "When the inflation rate is as high 7%, we have advised clients to break their FDs which are at lower rates and re-invest with the current bank or any other bank."

Though bank FDs are offering 10% returns, post tax returns will be only 7.5%. Besides, when depositors break their FDs before the maturity date, then they have to bear a pre-mature withdrawal penalty of 1-1.5%, which means post tax returns will be even lower.

In comparison, Fixed Maturity Plans, or FMP offered by the mutual funds offer higher returns. "If you looked at the alternative then there is a much superior alternative funds' fixed maturity plans, which are giving you a 10% post-tax return and pre-tax returns of 13.5-14%; so it is like investing in a 14% FD," says Rajiv Bajaj, Managing Director of Bajaj Capital.

Fixed maturity plans are currently the rage and the mutual fund industry has managed to garner around Rs 70000 crore to Rs 80,000 crore through these schemes because they earn a better post-tax return.

But for those who prefer the simplicity of FDs, the good news is that even if some high yielding deposit products close on March 31, bank FDs will continue to fetch high returns given the RBI's preference to keep rates high.