Professional Documents
Culture Documents
SUBMITTED BY
ADITYA KATOCH
Roll No.: 30
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Smt. P.D. Hinduja Trusts
NAAC Re-Accredited A
01:2008 THE BEST COLLEGE OF UNIVERSITY OF MUMBAI FOR THE ACADEMIC YEAR 20
Prin. Dr. Minu Madlani (M. Com., Ph. D.)
CERTIFICATE
________________ _____________
Project Guide Co-coordinator
________________
________________
________________ _______________
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DECLARATION
The information submitted is true and original copy to the best of our
knowledge.
(Signature)
Student
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TABLE OF CONTENTS
NO NO.
1. Introduction 06
1.1 Introduction
1.2 Objectives
1.3 Scope
1.4 Research methodology
1.5 limitations
2. Fixed Deposits 08
2.1 Introduction
2.2Characteristics.
2.3 Benefits.
2.4 Disadvantages.
2.5 Taxability
2.6 How banks FD rates vary with the central bank
policy
1. CHAPTER INTRODUCTION
1.1 Introduction
Fixed deposits gives you higher returns under which your amount is which
financial year as they get the benefit of triple indexation, thereby reducing
from one month to five years. Because debt funds enjoy long term capital
gains tax after three years, typically three-year FMPs are now popular.
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steady returns over a fixed-maturity period, thereby protecting investors
1.2 Objectives
To study about Fixed Deposits.
To study about Fixed Maturity Plans.
To study and understand as to how and why are Fixed Maturity Plans better
1.3 Scope
To acquire knowledge about the Fixed Deposits
To acquire knowledge about Fixed Maturity Plans
To know how FMPs are different and better from the bank FDs
from secondary sources such as books, journals, articles & the internet.
1.5 Limitations
The limitations of my projects were the time constraint I had only a period
of one week to find out the details about publicity and public relations in
doing this project. Mostly everything was available on the internet and the
journals.
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2. FIXED DEPOSIT
2.1 Introduction
A fixed deposit (FD) is a financial instrument provided by banks which
account, until the given maturity date. It may or may not require the creation
deposit in Canada, Australia, New Zealand, and the US, and as a bond in
the United Kingdom and India. They are considered to be very safe
for a fixed deposit is that the money cannot be withdrawn for the FD as
may offer lesser interest rates under uncertain economic conditions. The
The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be
as high as 10 years.
These investments are safer than Post Office Schemes as they are covered
depositor per bank. They also offer income tax and wealth tax benefits.
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Fixed deposits are a high-interest -yielding Term deposit and offered by
banks in India. The most popular form of Term deposits are Fixed Deposits,
while other forms of term Deposits are Recurring Deposit and Flexi Fixed
deposit).
To compensate for the low liquidity, FDs offer higher rates of interest than
Generally, the longer the term of deposit, higher is the rate of interest but a
bank may offer lower rate of interest for a longer period if it expects interest
rates, at which the Central Bank of a nation lends to banks ("repo rates"),
Usually in India the interest on FDs is paid every three months from the date
of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest
or sent to them by cheque. The customer may choose to have the interest
the Cumulative FD or compound interest FD. For such deposits, the interest
is paid with the invested amount on maturity of the deposit at the end of the
term.
Although banks can refuse to repay FDs before the expiry of the deposit,
cases, interest is paid at the rate applicable at the time of withdrawal. For
example, a deposit is made for 5 years at 8%, but is withdrawn after 2 years.
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If the rate applicable on the date of deposit for 2 years is 5 per cent, the
interest will be paid at 5 per cent. Banks can charge a penalty for premature
withdrawal. S
Banks issue a separate receipt for every FD because each deposit is treated
encashment.
Many banks offer the facility of automatic renewal of FDs where the
customers do give new instructions for the matured deposit. On the date of
maturity, such deposits are renewed for a similar term as that of the original
2.2 Characteristics
The main purpose of fixed deposit is to enable the person to earn a higher
to close the fixed account prior to maturity date. In such cases, the bank
produce at the time of maturity. The deposit can be renewed for a further
period.
2.3 Benefits
Fixed deposit encourages saving habit among people for a longer time.
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Fixed account enables the depositors to earn a higher rate of interest.
The depositor can get loan facility from the bank.
On maturity the amount can be used to make purchase of assets.
The bank can get the funds for a longer period of time.
The bank can lend such funds for short term loans to businessmen.
Fixed deposit indirectly boost economic development of the country.
The bank can also invest such funds in profitable areas.
2.4 Disadvantages
are low and if the inflation is very high fixed deposit investors are the worst
hit as the return from fixed deposit may not be sufficient to cover the high
If one invests all of his or her money in fixed deposits then he or she may
not enjoy the benefits of diversification which one gets if one invests the
money in stock markets, real estate, gold and other alternative investments.
taxation and hence one cannot take the tax benefit from this investment.
2.5 Taxability
called Tax deducted at Source and is presently fixed at 10% of the interest.
With CBS banks can tally FD holding of a customer across various branches
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and TDS is applied if interest exceeds Rs 10,000. Banks issue Form 16 A
the rate of tax slab of the deposit holder. If any tax on Fixed Deposit interest
is due after TDS, the holder is expected to declare it in Income Tax returns
If the total income for a year does not fall within the overall taxable limits,
(above 60 years of age) to the bank when starting the FD and at the start of
2.6 How bank FD rates of interest vary with Central Bank policy
inflation) a Central Bank adopts a tight monetary policy, that is, it hikes the
conditions, banks also hike both their lending (i.e. loan) as well as deposit
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(FD) rates. Under such conditions of high FD rates, FDs become an
attractive investment avenue as they offer good returns and are almost
FMPs, as they are popularly known, are the equivalent of a fixed deposit in
'guaranteed', but only 'indicated' in the FMP of a mutual fund. The regulator
does not allow fund companies to guarantee returns, and hence the 'indicated
returns' in FMPs.
Typically, the fund house fixes a 'target amount' for a scheme, which it ties
up informally with borrowers before the scheme opens. Since the fund
house knows the interest rate that it will earn on its investments, it can
securities. The tenure can be of different maturities, from one month to three
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years. They are closed-ended in nature, which means that once the NFO
(new fund offer) closes, the scheme cannot accept any further investment.
These FMP NFOs are generally open for 2 to 3 days and are marketed to
the FMP is for a year, then the fund manager invests in paper maturing in
one year.
The prevalent yield minus the expense ratio, which varies from 0.25 to 1 per
cent, will be the indicative return which can be expected from the FMP.
The expense ratio is mentioned in the offer document. The yield can be
indicated fairly accurately because these schemes are open only for a short
while.
The fund received is for a pre-specified tenure and the exit load from this
plan is high (usually 1 per cent to 3 per cent, depending on the time of
redemption). So, the fund manager has the liberty to deploy most of the
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The actual return can vary slightly, if at all, from the indicated return.
Against that, a bank fixed deposit exactly prints the amount which is due to
The magic is in the tax treatment of a mutual fund FMP. FMPs are classified
under the debt scheme category and enjoy certain tax benefits, such as:
a. Dividend in the hands of the investor is tax-free. But the mutual fund has
individuals and Hindu Undivided Families (HUFs), and 22.44 per cent in
indexation benefit.
c. Short-term capital gains are added to the income of the investor and taxed
as per his/her slab, whereas the interest on a bank deposit (except where
special 80C approved) is added to the income of the investor and taxed as
yielding 8 per cent for an individual investor in the highest tax bracket.
dividend growth
option option
Net yield 8% 8% 8%
Tax 33.66% - 33.66%
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DDT - 14.025%
Net yield 5.3% 6.8% 5.3%
Actually, the dividend distribution tax is deducted on the gross yield. So the
But for the sake of simplicity, it is calculated here on net yield. If the tenure
of the FMP is more than a year, the growth option gives a higher yield
The finance minister has been generous enough to recognise that inflation
erodes the real value of any investment. So every year, he comes out with an
have arrived at an indexed cost, then the long-term capital gain is taxed at
22.44 per cent and if you do not opt for the indexed cost, then the tax is
June 2009. It will pass through three financial years - launch in 2006-2007
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workings: Note: Cost Inflation Index for FY06-07 is 519. The assumption is
that the CII for FY07-08 is 567 and for FY08-09 is 592. Clearly, the post-
Bank
Fixed
Deposit 30 Month FMP
Without
With Indexati
Indexation on
Amount of
Investment (Rs.) 10000 10000 10000
Post Expenses
Yield (p.a)* 8.30% 8.30% 8.30%
Tenor (in
months) 30 30 30
Approx.
Maturity Amount 12,075 12,075 12,075
669
Indexed Gain NA NA
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Tax 698 150
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Post Tax Gain 1377 1925 1843
Approx. Post
Tax Annualised
Return 5.5% 7.7% 7.3%
funds. As the securities are held till maturity, FMPs are not affected by
interest rate volatility. Taxation Benefit: FMPs offer better post-tax returns
than FDs as well as liquid and ultra-short-term debt funds because they offer
indexation benefits. Indexation helps to lower capital gains and thus lower
the tax.
Triple indexation allows an investor to take advantage of indexing his
investment to inflation for four years while remaining invested for a period
of slightly more than three years. Lower Expense Ratio: Since these
instruments are held till maturity, there is a cost saving with respect to
for investors.
(CPs), money market instruments, highly rated securities (like 'AAA' rated
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3.5 Who can Invest & What be the Risks?
Investors across risk profiles may look at investing in FMPs though it comes
with a caveat that they are not completely risk free. FMPs face credit risk,
i.e. the chance of loss to an investor arising from the loan default of a
borrower who fails to make the promised interest or principal payments (on
a security in the portfolio) when due. The risk of default is lower if the FMP
monitor FMP portfolio disclosures. Investors must note that FMPs are
however, without a guarantee. Hence, FMPs may not necessarily fit into the
also note that bank FDs up to Rs 1 lakh are guaranteed by the government
instruments in such a way, that all of them mature around the same time.
During the tenure of the plan, all the units of the plan are held until they
the plan.
The basic objective of FMPs is to generate steady returns over a fixed
tenure, thus shielding investors from interest rate fluctuations. FMPs achieve
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this by investing in a portfolio of debt securities [predominantly certificate
matches that of the scheme. These securities are redeemed at the end of the
FMP term. For example, if the FMP is for 12 months, the fund manager will
closed ended and investors cannot redeem units with the mutual fund during
the FMP tenure, the fund manager need not sell any part of the portfolio
during this tenure thus locking the yield of the portfolio. This also mitigates
the risk of loss on premature sale of securities and lowers the interest rate
investors like in the case of FDs, where interest rates are pre-defined.
exchange, where they are listed. However, trading in these units is negligible
which makes FMPs illiquid. Compared to this, open end debt funds which
Initially, the strict bearing of SEBI (Securities and Exchange Board of India)
difficult for potential investors to get any clarity on the returns that they
would get when investing in FMPs. But in 2011, they relaxed this rule so
that investors can now be well aware of the asset allocation in such close-
ended schemes.
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If you are investing in an FMP, knowing and understanding the asset
allocation should be your priority, as you can predict the maturity on returns
Bonds
Non-convertible debentures
Commercial Papers
Certificates of deposits
vis-vis FDs. The interest received from FDs is subject to tax at the investor's
marginal rate of tax, which can range from 10 to 30%. However, returns
12.5% (for retail investors) plus applicable surcharge and cess, which is
b. If investors opt for the 'growth' option, they are subject to Capital Gains
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than 1 year, one can use the benefit of long term capital gains where the
benefits).
market, liquid and debt funds (including FMPs) has been increased to
30% from 25% and thus will now be taxed at par with bank fixed
deposits (30%)
For FMPs with tenure of less than a year, the dividend option is more
FMPs also offer double indexation benefits, which comes into play when
the scheme purchase is made in one financial year and the maturity of the
scheme is after two financial years. Indexation (for tax purposes) allows
taxed only on the real returns. For example, if a 13-month FMP is launched
in March 2010 i.e. FY 2009-10, it will mature in April 2011 i.e. FY 2011-12.
year, the purchase and sale years are spread over two financial years, called
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4 FIXED MATURITY PLANS VS FIXED DEPOSITS
Simply put, fixed maturity plans (FMPs) are the mutual fund industries
version of fixed deposits (FDs). Over time, they have established a place in
with FDs and replace them with FMPs. So what is it about FMPs that makes
investors. Its over here that FMPs diverge from FDs in a big way.
FMPs are close-ended debt funds. Investments can be made in them only
during the new fund offer period. FMPs invest in debt instruments issued
the maturity of the FMP. Hence the name - fixed maturity plans.
The investments made by the FMP have an indicative yield. This means,
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returns indicated at the time of investing. The deviation might not be
taxable at the applicable tax slab, also known as the marginal rate of tax.
With FMPs the tax implication depends upon the investment option
In the growth option, returns earned are treated as capital gains (short-
In the case of short-term capital gains (i.e. if investments are held for less
than 365 days), the interest income is added to the investors income andis
As for long-term capital gains (if investments are held for more than 365
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With the indexation benefit, FMPs end up delivering more tax efficient
3) Tenure:
tenure. From a few months to several years, there are investment options
available across different points of tenure. Investors can select the tenure
4) Liquidity:
FDs score over FMPs in liquidity. Being fixed income in nature, there
are restrictions on liquidity in both cases. But FDs can generally be
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5 FIXED MATURITY PLANS ARE BETTER THAN
BANK FDs
Traditionally almost around 85% of the people in India invest their surplus
funds in Bank Fixed Deposits, Postal Schemes etc. This clearly indicates
that safety and security of the principal amount is the first priority when it
investment is taxable or not. Also people do not evaluate whether the post-
tax returns will be able to beat inflation or not. Nobody can certainly deny
the importance of safety but one has to always search for and evaluate the
options which are equally safe but can give help you generate better returns
or can give tax advantage over other equally safe investment avenues. It is
to certain percentage of total assets depending on time horizon and your risk
profile.
Thumb rule says debt must constitute minimum equal to ones age in
time horizon of your particular financial goal. If time horizon for a particular
goal is just 1 year to 1.5 years than 100% of such corpus in debt makes
sense. Most of the investors invest their funds in bank fixed deposit for time
horizon of 1 to 1.5 years. But there are other alternatives available in the
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market which can give you better post tax returns compared to bank FDs
and are equally safe. Mutual Funds FMP (Fixed Maturity Plans) are the
better alternative for time horizon of around one year investments compared
to bank fixed deposits which not only gives higher return but are also tax
efficient. FMPs are closed ended schemes with the maturity period ranging
from 370 days to 390 days which are commonly known as 1 year FMP. The
maturity period of FMPs may vary from 90 days to three years but most
Here we will discuss the pros and cons of only 1 year FMPs. These schemes
invest 100% of their corpus in debt portfolio which consists of corporate and
and rated. The funds thus invested are relatively safe compared to income
funds as the volatility in the interest rates will not affect returns of the fund
as the entire corpus collected in the scheme is invested for the fixed term
which is almost equal to the tenure of the fund. These funds are closed
ended in which investment can be made only during the NFO period. The
schemes get listed at recognised stock exchanges but effectively these are
not traded and volumes are negligible so one has to hold this till maturity for
all practical purposes. Thus they are almost at par with bank FDs as far as
case of bank fixed deposit you know what return you will get at the time of
making the deposit itself. Whereas in case of FMP the returns are not
guaranteed it is market linked and returns will depend on the return of the
portfolio. However, one can find out as to what will be the indicative
investment return from a particular FMP. The returns on this are higher than
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bank fixed deposit because they are floated for identified borrowers and as
the volume size is big, they can easily negotiate for better deal. Moreover,
income arising out from this will be taxable under the head long term capital
gain as the same is held for more than one year and investors get benefit of
indexation. Please note that the benefit of indexation and concessional tax is
Since the FMP looks better than bank FD and if one wants to invest in FMP
The one most important thing an investor needs to check before investing is
the ratings of the portfolio in which the fund is likely to be invested. The
investors should invest only in the schemes which will invest their funds in
AA+ and above rated papers or bonds. The funds which invest in AA-
papers or bonds or lower rated are riskier and one should be aware of risk
involved in such schemes. For past one year of 1 year FMP is around 10%
say an FMP not gives higher return compared to fixed deposits but also has
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6 CONCLUSION
With the end of the financial year approaching, mutual fund houses are back to
of the sector till the tax laws were changed by Finance Minister Arun Jaitley in
Budget 2014-15.
A number of fund houses such as ICICI Prudential, Birla Sun Life, UTI, Tata
and DSP BlackRock have either launched or filed offer documents with the
Securities and Exchange Board of India to launch these products. But, before
investing, one should remember the taxation of this instrument has gone
product that needs to be compared with tax-free bonds or fixed deposits (FD).
people who do not mind locking in their money for at least three years,
rates of around eight per cent, whereas State Bank of Indias three-year fixed
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This means a clear advantage, in terms of returns, with some risk for FMPs
because they invest in corporate bonds which can turn risky when times are
bad. But, even if they offer a lower rate of return than fixed deposit,
rate is 7.5 %, the returns will be better in case of the latter. Lets look at some
the income-tax bracket of 30 per cent stands to lose 8.33 %as capital gains tax
inflation rate to be five per cent annually, the indexation benefit will be 20 per
cent (because for a three-year FMP, the indexation benefit will be of four
years, if you invest before March-end) on returns of 22.5 per cent from an
FMP. The taxation: 20 per cent of 2.5 per cent returns. The difference: A
substantial one six per cent (FD 16 per cent vis-a-vis FMP 22 per cent). Post-
tax returns of over seven per cent annually is quite a good. Only instruments
like Public Provident Fund offer higher post-tax returns, but there are an upper
limit on investment,
However, one needs to be clear that they want to be invested for the entire
period because exiting in the interim will hit them hard. With the change in the
tax guidelines in Budget 2014-15, if you exit an FMP before three years, the
capital gains will be added to your income and taxed according to the income-
tax slab. The instrument, therefore, becomes tax-inefficient and lacks liquidity
withdraw in the interim and you should be fine, advise financial planners.
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7 REFRENCES
http://www.axisbank.com/personal/insurance/life-insurance/mnyl-guaranteed-
lifetime-
http://profit.ndtv.com/news/your-money/article-which-life-insurance-policy-
should-you-buy
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