Returns: Returns are an extremely sensitive subject for fixed income investors. It’s over here that FMPs diverge from FDs in a big way.

FDs offer assured returns, indicated to the investor at the time of investing. Returns on FMPs can be understood once you get an idea of how FMPs work. 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 by corporates and their investments have a maturity that coincides with the maturity of the FMP. Hence the name - fixed maturity plans.The investments made by the FMP have an indicative yield. This means, on maturity, there is a possibility of the actual returns deviating from the returns indicated at the time of investing though the deviation might not be significant at the end.

Taxation: FMPs also differ from FDs in tax treatment of income.

In FDs, the interest income is added to the investor’s income and is taxable at the applicable tax slab, also known as the marginal rate of tax. With FMPs the tax implication depends upon the investment option – dividend or growth.

In the dividend option, investors have to bear the dividend distribution tax (DDT).In the growth option, returns earned are treated as capital gains (short-term or long-term depending on the investment tenure).

With the indexation benefit, FMPs end up delivering more tax efficient returns than FDs.

Tenure: FDs and FMPs offer equal flexibility when it comes to investment tenure. From a few months to several years, there are investment options available across different points of tenure. Investors can select the tenure suiting their investment objectives and needs.

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 But FDs can generally be withdrawn without penalty, unlike FMPs.