Fixated on Fixed Deposits - Moneylife: Personal Finance Magazine

Locked up all your money in FDs? Try these two products to gain higher post-tax returns
Sulekha Nandani is a middle-aged working professional and earns a steady stream of income. She is seeking a safe investment avenue wherein she can put in some of her money to earn decent but assured returns. What does she turn to? The ubiquitous bank fixed deposit (FD), of course. She happily pockets the 7%-7.5% return and advises her risk-averse friends to do the same. She forgets to mention the fact that the interest earned on the deposit is liable for taxation to the fullest extent possible (30%, in case she falls in the highest tax slab). Neither does she realise that this tax, coupled with inflation, has actually eroded her returns and left her with nought. Like Ms Nandani, most Indian investors tend to overlook the impact of taxes and inflation on their FDs, and continue to put money into them purely because of the safety factor. They frown upon any other investment avenue, even if it means they could earn healthier post-tax returns. FDs are unmatched for safety. But there are two other products that offer a better post-tax return—fixed maturity plans (FMPs) and capital protection funds (CPFs).
A CPF is a close-ended mutual fund that seeks to protect the capital by investing in quality fixed-income instruments maturing in line with the tenure of the scheme and seeking capital appreciation by investing in equity and equity-related instruments.
FMPs are close-ended debt funds with a fixed maturity horizon. Both are similar in nature; they attempt to combine the stability of debt along with a wee bit of the power of equities. They are so designed that the amount of money invested in the debt component is equivalent to the initial investment on maturity. Unlike FDs though, their returns are only indicative and not guaranteed. But the post-tax returns they offer are far more impressive than in the case of FDs.
Neeraj Bahal of Fasttrack Investments confirmed, “Instead of investing in an FD with 8% interest, one will gain more in an FMP with a much lower yield.” Both FMPs and CPFs offer inflation-indexation benefits to the investor and lower tax (20%). Otherwise, the entire amount would be taxed at 10%, without indexation. Before you jump in though, be aware of the nuances of both products in terms of management fees, growth/dividend option, etc. While the scope for post-tax returns is still comparatively higher, the returns are only indicative. During the crash of 2008, FMPs were in deep trouble because some of them had just one or two (risky) bonds in their portfolios.