In a low interest rate environment that is likely to continue for some more time given the economic conditions currently in the wake of the world's worst health crisis that India confronts what maximum return you get on your bank FDs or for that matter by keeping your deposits in the post office are sub 6 percent. So, amid an already gloomy scenario, if you want to add up to your wealth and gain substantial returns that fetch better returns than bank or post office time deposits you may consider the following investment options:
1. Fixed Maturity Plans (FMPs):
What are Fixed Maturity Plans (FMPs)?
Fixed Maturity Plans are close-ended debt plans which deploy funds in debt securities including government securities, high-rated NCDs or non-convertible debentures, money market securities, certificate of deposits (CDs), corporate bonds and commercial papers or CPs. The FMPs are offered for different maturity timeframes; that may be as short as three months or as long as 3-4 years
Note- Returns from the FMPs which are reflected in their NAVs fluctuate depending on the movement of the interest rate in the economy and hence there can be volatility in them.
Who should invest in FMPs?
• Low-risk investors (investors who can afford some degree of risk) or investors who have surplus money with no liquidity constraints can typically invest in FMPs. This is because these FMPs come with low liquidity.
• Also as the returns from them depend on the interest rate in the economy, investor should be willing to accept the fluctuation in their NAV value. So, those looking for a higher return than usual bank FDs can park their money in FMPs.
How FMPs offer better return than FDs?
The FMPs allow its investors to lock in the current market yields for a medium term of say 3-4 years with a substantial tax benefit. In the case of FMPs maturing after 3 years there is provided indexation benefit on computation of tax liability. But fixed deposits regardless of the maturity term attract tax implication on interest made depending upon the slab of the investor.
Real all about FMPs here.
2. Debt mutual funds:
What are Debt mutual funds?
These are mutual funds that invest in fixed income securities including corporate bonds, government-securities, corporate debt securities and money market instruments among others. These are also referred as bond funds or fixed income funds.
Who should invest in Debt mutual funds?
Rise-averse or low risk investors looking for steady income stream can opt for debt funds as these are less volatile in nature. So, those of you who until now took to conventional fixed income options such as FDs can consider debt funds for higher returns as they are more tax efficient.
Comparison of Debt mutual funds and Bank Fds on various parameters
|Parameter||Debt fund||Fixed deposit|
|Return||7-9 percent||6-8 percent|
|Risk level||Low to moderate||Low (fixed deposits insured by the DICGC up to the limit of Rs. 5 lakh)|
|Liquidity And early redemption||High. Allowed and exit load charges depend on the AMC||Low (pre-maturity withdrawal entails a penalty)|
|Expense ratio||Nominal amount||No such charges|
|SIP facility||SIP and lump-sum investment options both are available||Only lump sum investment can be made|
How debt funds can offer a higher return than Bank FDs?
Typically returns from debt mutual funds depend on the interest rate trajectory. And they may produce higher return than Bank FDs by way of capital appreciation as well as by providing regular income in the form of dividends.