Fixed Maturity Plans - Why Invest

Fixed maturity plans are close ended debt schemes that are open for investment for a few days during launch and then closed until maturity. 

They come with a pre determined tenure and are usually offered for tenures varying from 30 days to five years and the most commonly offered tenures are 30 days, 180 days, 370 days and 395 days. 

They invest in highly rated securities, certificate of deposits, money market instruments, bonds and government securities

The basic objective is to seek consistent returns over a fixed period and aiming to protect investors against market fluctuations. 


They are  similar to bank fixed deposits in that the money invested is locked in for the tenure of the scheme and can be described as debt funds that invest in government securities and company debt.

They usually have no equity component, unless you invest in one that chooses to have a limited equity component.

They try to protect investors against market fluctuations and offer flexibility to their fund managers and let them plan on their exact investments at the start.

This allows investors to know and be informed about the approximate returns they can get by investing in these plans.

They are ideal for all investors wanting benefits across different parameters, such as lower market risk and tax efficient returns.

Investors can choose the plan that match their investment requirements and also their cash flow requirements.

You can invest in fixed income instruments like certificate of deposits , commercial papers , other money market instruments, corporate bonds, non-convertible debentures of reputed companies, or in securities issued by the government, maturing in line with the time limit of the scheme.

Since they are closed ended schemes, an investor can invest only during the initial offer period of the scheme, and redeem only at the time of maturity of the series under the scheme.

However, unit holders holding units in demat mode, can exit by selling their units on the stock exchange where units of the scheme are listed.

They are least exposed to interest rate risk, as the fund holds instruments till maturity getting a fixed rate of return.

One can invest in highly rated credit instruments with maturity profiles of the invested securities in line with the maturity of the scheme, so there is low credit risk, with minimal liquidity risk involved.

 It works as asset allocation tools, that endeavor to provide the investor with stable returns for the period of investment.

They are also better as a tax saving instrument and if it is longer than a year, investors may choose to avail indexation benefits to check their taxable liability against prevalent inflation for the period.

When there are high prevailing rates, and with other asset classes not adequately performing,investors can invest in fixed maturity plans which lock in returns by investing in instruments maturing on or before the maturity of the scheme.

They can make use of prevailing high yields, without assuming the volatility risk of investing in a time duration product.

However they are not allowed to provide indicative yields to investors while in fixed deposits the interest rates are known in advance.

If you go for the dividend option ,then they are subject to dividend distribution tax  plus applicable surcharge and cess, which is paid by the fund and is tax free for investors.

If investors opt for the growth option, they are subject to capital gains tax and in case of a growth option with a maturity of more than one year, an individual can use the benefit of long term capital gains where the tax rate is 10% without indexation benefits or 20% with indexation benefits.

Those plans with tenure of less than a year, the dividend option is more appropriate as it results in lower tax incidence compared to the growth option, which would be taxed at the individual income tax slab rates.

It also offer double indexation benefit, 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 returns generated to be adjusted for inflation so that the investors are taxed only on the real returns.

Thus, fixed maturity plans maybe riskier but compared with fixed deposits they offer better returns to the investor.

Why Invest In Gold

Gold also known as the yellow metal is an asset valued as a safe heaven in the world of investments and it known for acting as a hedge against inflation.

There are different ways to invest in gold in and we need to be aware of all the options before making a decision.

The most popular and oldest way to invest in gold is in the form of physical gold as this is what most of the people are comfortable with .

There are two ways that one can invest in physical gold

Jewellery is the most common way of investing in physical gold but it is brought by people for consumption rather than investment.

It is easy to invest in it , all you need to do is use cash or cheque and you can buy it however you do not just pay the market price of gold , but also making charges for jewellery .

When it comes to physical gold, there are chances of theft and fraud as you can be sold a inferior quality of gold in the name of high quality gold.

If a marriage going to be there then people prefer to invest in physical gold or if it will not be required for emergency in short term. 

If you do not believe in the online option , that is another reason that you can go for investing in physical gold.

Gold coins and bars are another way to invest in physical form of gold and they are sold by all the banks and jewelers . 

The good thing is that depending on the requirement you can either buy more gold bars and coins and easily available at banks and jewellery shops , but banks only sell it not buy it back. 

There is no consumption done on regular basis so a person can keep it in locker or some safe place for a long time. 

The disadvantage is that they are available at a premium price of 5-10% and at the time of selling, you will get a discounted price of 5-10% , so overall your returns will decrease.
  
Gold ETF’s which is an online version of physical gold are just like stocks , you can invest in these if you have a demat account . 

It is convenient to invest in Gold ETF if you already have a demat account and can start with a small amount of 1 gm value and as and when you want you can invest from time to time. 

However you have to pay the brokerage and you do not get a feel of gold in your hands which you get with physical gold . 

The gold ETF can also be converted to cash at times if you have not chosen the right one and there are chances that you will sell then in the time of small emergencies which you will not do with physical gold. 

The expectation is liquidity with exposure to gold for investment point and you can buy gold ETF with a demat account.

 You can invest and can consider them as liquid as you can sell them in the stock market.

Gold Mutual funds are those mutual funds which invest in another parent mutual fund which are related to gold related activities and buy physical gold , but in very small quantities .

This is not a good investment for those who track gold prices , because these funds do not invest most of their money in gold , but gold related companies .

So its mainly a equity fund which invests in companies which does nothing but invests in its parent mutual fund which finally invests in different companies .

The good part of these funds is that if you are optimistic about the future of those companies involved in gold but you will pay expense ratio two times because it is fund of funds.


These are the mutual funds which invests in real gold, pool in money from people and buy gold and you can buy the units of these mutual funds .  

The best part of these funds is that you can invest in gold through SIP route and you do not need to have a demat account to invest in gold saving funds . 

You also can invest regularly in gold through SIP through this funds but you pay administrative charges and expense ratio just like any other mutual funds. 

If you do not have a demat account and would like to regularly invest on monthly basis as this is highly liquid option also because you can anytime sell the gold fund units like any other mutual funds unit .  

e-Gold was started in India from the exchange called NSEL , which also has other commodities in e-format . 

Its is like Gold ETF , where you can invest in Gold in online format for investing in E-Gold you need a demat account, but with one of the companies that are authorized by NSEL. 

You can also take physical delivery of gold with some terms and conditions. but not all big brokerage houses demat account can be used to buy this, you need to open another demat account for this and this option is not popular with retail investors . 

You can buy this if you need physical delivery of gold at some future point of view but you also want to benefit from the online advantages like the market price and no storage cost at your side.  

Invest in gold can also be done through Gold Futures, but it more of a trading activity because its short term in nature. 

You can use Gold Future to protect the pricing, then you can lock the price so that when you want to buy the gold after 3 months, you get it at the same value .   

This option is bit technical and one should only use it if you have the knowledge of how it works.. 

You need to know when to lock the price of gold which you want to buy in future, if you fear that prices can go very high and which option are you going to choose and why it will work.

  

Bank Fixed Deposits - How To Invest

Bank deposits are one of the most preferred investment options in India as they are known for being safe and not risky, especially in comparison with other investment option like the stock market and mutual funds.

A fixed deposit (FD) is a financial instrument provided by banks which gives investors a higher rate of interest than a regular savings account, until the given maturity date.

It may or may not require the opening of a separate account and are they are considered to be very safe investments with term deposits being used to denote a larger class of investments with varying levels of liquidity.

In a fixed deposit investment, the money cannot be withdrawn from the FD as compared to a demand deposit or recurring deposit before maturity.

Banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates.

 The banks may offer lesser interest rates under uncertain economic conditions that varies in percentage terms with the time period that can vary from the short term such as 7 days to a long term of 10 years.

These investments are safer than Post Office Schemes as they are covered by the law and that guarantees a specific amount per depositor per bank with income tax and wealth tax benefits.

 Those from reputed banks are a very safe investment because such banks are carefully regulated by the Reserve Bank of India, RBI, the banking regulator in India. 
 
It is important to note that company FD is not reliable as compared to a bank FD because if the company goes bankrupt you may lose your money.

 You need to check the credit rating of a company before investing and be careful of companies which offer interest rates that are significantly higher than the average to attract your money.

An FD gives you the option of receiving regular income through the interest payments that are made every month or quarter and this is especially useful for the retired.

It must be noted that a fixed deposit will not give you the same returns that you may get in the stock markets but the risks of investing in stocks are higher.

A fixed deposit is not helpful against inflation and if inflation rises steeply during the maturity of the FD your inflation adjusted return will fall. 

There are two types of term deposits - fixed deposits and recurring deposits.

A fixed deposit is where you invest all your money at one-go whereas a recurring deposit is when you invest your money in installments.

When you opt for a term deposit, you are placing your funds in a particular bank deposit for a fixed period of time and for this banks offer you to pay a fixed interest and makes it a safe alternative because the interest payment acts as your profit from the investment.

Senior citizens usually get a higher interest and while fixed deposits offer higher interest rates, recurring deposits usually offer a lower interest rate than fixed deposits.

You can decide when you want to receive the interest due once the deposit matures, you can opt for regular interest payments on quarterly, half-yearly or annual periods of time and some banks also offer you a choice to reinvest your interest payments.

Term deposits offer a wide variety of interest rates that changes with the duration of the deposit with the greater the duration, larger is the interest rate offered.

This makes investors deposit money for as longer a time as the bank pays interests regularly and over a period of time, this money can either be reinvested in the same deposit or saved in your bank account that would earn you additional interests, thus increasing your total return.

The money you deposit with the bank acts as a source of cheap borrowing for the bank but the money in the savings accounts could be withdrawn any moment by depositors.

This increases risks for the banks and that is why banks actively try to attract deposits to invest in term deposits because the amount in deposits are unlikely to be touched for a longer period of time.

The only rule of a term deposit is that once you deposit, you cannot withdraw this money and if you want to reclaim your deposit amount, you will be fined a particular sum or your total interest payment may be reduced.

Banks may only allow you to withdraw the money after a certain minimum period.

Breaking a fixed deposit means withdrawing the money before the maturity expires and this may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere. 

If you are in need of liquid cash, and you have withdrawn all of your funds in your bank accounts, you can borrow on the basis of your fixed deposits and this is called the overdraft facility.

There is a limit to how much you can borrow under this service and it may not be interest-free.

Interest payments on fixed deposits are taxable and this depends on your overall income tax bracket to which you belong.

If you fall in the 20% income tax bracket, your interest payments would be taxed at the same rate and this is why fixed deposits are usually not preferred by those in the 30% bracket.

Also, if your total interest payment in a year exceeds Rs 10,000, then the bank cuts 10% as tax deducted at source (TDS).

However, if you submit the Form 15G/H to the bank stating you have no taxable income, then the bank will not deduct tax. 

You can also split your term deposits across banks to ensure the interest is not more than the amount of INR 10,000 in a single bank.

Banks offer fixed deposits for tax-saving purposes and the amount you save in such deposits can reduce your total taxable income and thus help you save taxes.

Tax-saving deposits have a minimum tenure of 5 years and a maximum of 10 years and the government has also kept the maximum amount you can invest in such a deposit for tax purposes to Rs 1 lakh per year but the interest you earn will be taxable.