Comparsion of Bank FD, Debt Mutual Fund and FMP

Now that you have an idea of the Debt fund and FMP, here is a small article on comparing the various instruments and trying to identify which one is the right one for you.

Bank FD
1. Ideal for those in low income tax bracket or no income tax bracket.
2. Ideal for those who want to take no risk at all i.e. who consider that depositing at SBI or ICICI is safer to give than L&T (AAA rated company) through a mutual fund.
3. Ideal for those who are not conversant with the concept of mutual fund and do not want to understand what a debt Mutual fund.
4. Ideal for those who deposit fr a period of 5 year to get the Sec 80C income tax benefit (Indian Income tax rules allow bank deposits for 5 years and above to be treated as an investment for the purpose getting income tax rebate).
5. Ideal for those who do want liquidity but want to be able to get back the principal without any loss.

FMP
1. Ideal for those who think that the interest rates have peaked out for the near future or nearing the peak and want to lock on the yield that one will get for a long period of time. They believe that interest rates will start falling from now on.
2. Ideal for those who do not want liquidity and can wait till the maturity period of the FMP.
3. Ideal for those in the high income tax bracket but want an instrument close to that of a bank deposit.
4. Ideal for investors who are atleast looking at a period of more than 1 year though there is still some benefit for investors investing in FMPs of maturity of less than 1 year but not as much as those investing for more than 1 year.

Debt Mutual
1. Ideal for those who believe in Systematic Investment plan and are looking really long periods of time for their returns so that the good times and bad times get averaged out.
2. Ideal for those who are sure of the time period of their investment
3. Ideal for those who think that the interest rates are peaked out or nearing the peak and want to get high returns by timing the market where they believe that the interest rates will fall fast enough for them to get the capital gains (see my blog on Effect of interest rates on Debt Mutual Fund
4. Ideal for those in an interest rate regime where the interest rates are seen to fall in the future.

So which one should you invest in ??

My take is that one will have to ensure that the portfolio of debt is continuously monitored based on the dynamics of the market and move the funds accordingly.

Right now, I would urge each of you to lock your funds in FMPs of 24-36 months maturity periods.

Here are a few FMPs that are open as of now
1. JM FMF- Sr V- Qtrly 5 - RP (G) from JM Mutual Fund
2. Lotus India FMP-1 month and 3 Series (extended till July 31st)

As the saying goes "Do not put all the eggs in one basket" and have a debt portfolio that best represents you in the current scenario.