Reap more than you sow

Investment is one of the most important decisions in a person’s life that must be taken with utmost attention and knowledge so that you can easily fulfil your own and your loved one’s dreams without worrying about the finances.

It would be true to say that investing your hard-earned money is a key step towards wealth creation for an important financial goal. To make sure that you get maximum returns, it is important for you to invest properly and only in products that can help you fulfil your investment goals. There are numerous financial instruments available in the market, but not every instrument will cater to your specific needs and requirements. You need to invest as per your financial capacities as well as according to your risk profile.

‘Guaranteed Return Products’ are traditional non-participating investment-cum-savings plans that promise guaranteed returns without the investor having to worry about the market volatility risk.

We have all been taught by our parents that bank fixed deposits are one of the safest and most convenient savings instruments that guarantee returns after a fixed time. These products offer a fixed return for a longer period without the risk of market volatility. No doubt, there was a time when bank fixed deposits were one of the most powerful savings tools available in the market. However, times have changed.

Over the last few years, savings products like bank fixed deposits have started to face declining customer interest due to falling rates of interest. Earlier, tax-saving bank fixed deposits with a tenure of five years used to offer interest up to 8.5% per year. However, the story is completely different today. The rate of interest on FDs has fallen from 8.5% per annum in 2014 to 5.4% in 2020, which is an all-time low.

Another important reason why people are switching to other financial instruments is reinvestment risk. Bank fixed deposits have a maximum lock-in period of 10 years, which means you cannot lock-in the rate of interest for more than 10 years, and considering the constantly falling interest rates, returns on bank fixed deposits are sure to fall further.

One of the most popular alternatives to bank fixed deposits — guaranteed return products —promise better returns than an FD. The current rate of return that most guaranteed return products are offering is up to a maximum of 6% per annum. These plans come with different payment terms and policy terms and promise maximum IRR — the annual rate of growth the investment is expected to generate — ranging between 5.5% and 6%. In fact, this is for the first time in 21 years that interest rates on guaranteed return products are better than FD rates. This means, considering the current market scenario, the rate of interest offered by guaranteed return plans is almost up to 0.5-1% more than most bank FDs. The guaranteed return products also cater to the reinvestment risk as customers can lock in the rate not just for 5 or 10 years, but for 45 years.

No tax on returns
Yet another prominent advantage of guaranteed return products over bank fixed deposits is tax-free returns. While the amount that you invest in bank fixed deposits – with a minimum tenure of 5 years – is tax-free under Section 80C of the Income Tax Act, the customer needs to pay tax on the maturity amount. In contrast, there is no tax on the amount invested and the maturity proceeds under guaranteed return products.

For a guaranteed return plan for ?6 lakh that you invest over 10 years, the returns will be in the range of 5.77-6.04%, while for a fixed deposit it will be 5.40%. Post-tax returns remain the same for a guaranteed return plan, while for an FD it is 4.9% under the 10% tax slab, 4.6% under 20% slab and 4.2% under the 30% tax slab.

Often investors have a complaint that there are hardly any investment products available in the market offering the option of easy liquidity as bank fixed deposits. All investment products that offer the option of liquidity charge significantly high surrender charges, unlike bank fixed deposits, where customers do not need to pay any liquidity charges. Fortunately, insurers have now come up with no-surrender charges products under the guaranteed return products category, wherein customers do not need to pay any surrender value in the first five years and can easily liquidate the policy. The feature of liquidity is also very important under an investment product as one may encounter expenses that may need one to break into the savings. For now, this feature is only available under Tata AIA’s Fortune Guarantee Plus - Single Pay. You may also choose to invest in ICICI Prudential Life Insurance’s Guaranteed Income for Tomorrow plan, under which if you invest ?1 Lakh per annum for a term of 10 years, from the second year itself, you will start receiving a yearly payout of ?24,960 until the eleventh year and from the eleventh year till the 20th year, you will receive a yearly payout of ?1,30,800.

‘When planning to invest in guaranteed return plans, it is always suggested to buy online as a few guaranteed return plans sold online promise extra maturity benefit to the customers in comparison to offline products.’