FMP v/s FD: Fixed Maturity Plan or Fixed Deposits? What to Choose?

In one of my previous articles, I'd given an Introduction to FMP Fixed Maturity Plans. In this article, let us discuss whether FMP or Fixed Maturity Plan a good investment, do FMP or Fixed Maturity Plan always guarantee good returns and what are the risks associated with investments in FMP or Fixed Maturity Plan.

We will also make a Comparison between FMP & FD or basically, Compare Fixed Deposits and Fixed Maturity Plan.

What is good about FMP or Fixed Maturity Plan as compared to FD or Fixed Deposits?
To put in simple terms, A Fixed Deposit is taxed to the maximum level depending upon the person's tax bracket while a FMP or Fixed Maturity Plan, the tax liability is not that high. If a person who is in the highest tax bracket of 30% when opens a Fixed Deposit, will have to pay 30% tax on his FD earnings. But it is possible that the same person may pay only 22% or so if he invests in FMP or Fixed Maturity Plan.

So why do people opt for Fixed Deposit as compared to FMP or Fixed Maturity Plan, when the tax advantage is available in FMP or Fixed Maturity Plan ?
The answer lies is No Risk, No Gain principle. Nothing in this world comes for Free - same is the case with FMP or Fixed Maturity Plan. FMP or Fixed Maturity Plan are comparatively riskier than the Fixed deposits so that offsets the tax benefits.

Can we have an example on how FMP or Fixed Maturity Plan are riskier?
First thing - a FD or Fixed Deposit will offer you the quoted returns for sure. If while opening the FD, you are told 11%, that means you will get 11%. However, on FMP or Fixed Maturity Plan, the returns are only INDICATIVE - though they may or may not be given the exact returns in terms of interest.

Apart from uncertain % indicative returns, what are the other risk factors associated with FMP or Fixed Maturity Plan?
The biggest risk factors are that FMP or Fixed Maturity Plan are offered by financial companies and they are not backed by the government as that in case of the bank account or Fixed deposits. FMP or Fixed Maturity Plan are offered by Mutual Fund houses or firms. If the Mutual Fund goes burst like Lehman brother did, then you dont have any safety for your pronciple or the interest amount.
Hence, say you decide to put your money in XYZ FMP from XYZ mutual fund. If the XYZ fund house is having a problem, then all your money will be gone.

So dont just jump in for a FMP or Fixed Maturity Plan because it is offering a higher rate of return (indicatively). Think before your leap. There are cases of investors who invested their money in debt based funds, which in turn invested that money in Lehman Brothers Bonds, but when the Lehman Brothers Collapsed, all the bonds and the debt based instruments value went to zero.