Payment Terms

Guaranteed return plans vs term deposits: which is the best investment option for you?

Traditionally, people had an invariable preference for Fixed Deposits (FDs) to protect their children’s future or to achieve their financial goals. Constant interest rates and zero market risk have made FDs an attractive avenue to lock in one’s money. This system worked perfectly well until about ten years ago. The rate of return offered varied between 7% and 9%, which resulted in a reasonable corpus at the end of the mandate. But then Indian economic conditions changed drastically and prevailing FD rates fell sharply to an all-time low of around 5%.

Therefore, those looking for a workable and safer alternative can consider a guaranteed return plan. It ticks the box of being primarily an investment for risk averse people, with the added benefits of the life insurance element. Moreover, it promises a guaranteed rate of return without being impacted by market volatility. It therefore offers the best of both worlds.

Guaranteed return plans are an appropriate product for employees, especially solo employees, and can be purchased by anyone between the ages of 18 and 60. In addition, this plan is an ideal savings tool for tenure ranging from 10 to 45 years. It is also an optimal way to achieve long-term future goals such as a child’s college education, marriage, and even planning for retirement. In addition, it offers a guaranteed return that is fixed at the time of purchase. This particular aspect contrasts with fixed deposits, where the rate of return fluctuates, is subject to tax, and therefore, is relatively lower.

For example, if a 35-year-old invests an annual premium of Rs 5 lakh in Bajaj Allianz Life Assured Wealth Goal for a premium payment term of 10 years, he will earn returns of 6.41%. However, for existing customers, the rate will be as high as 6.46%. Another policy that can be considered is the Max Life Smart Wealth Plan which offers a rate of return of 6.20% for similar investment terms and conditions. FD, on the other hand, will recoup around 5% taxable interest rate.

Another factor that makes them ideal is their flexibility and customization. The policyholder can make adjustments to the term to ensure present and future needs are met. For example, you can choose to invest anywhere between Rs 2500 and Rs 2 lakh per month or even choose an annual investment. Also, there is an option available for a one-time investment or an investment over a term of 5, 7 or 10 years. Likewise, you can choose to receive the income monthly or annually.

What sets these plans apart from other investment options is the fact that they also provide a safety net for dependents in the event of the unfortunate death of the insured. The policy provides life coverage equal to 10 times the annual premium, in which it protects the dependent financially. Therefore, a plan that fully protects the dependent rather than only providing returns on investment should definitely be preferred.

Besides these benefits, for most people, investing is as much a reason to take advantage of the plan’s features as it is to gain tax benefits. So, under guaranteed return plans, you can reduce your taxable income under Section 80C of the Indian Income Tax Act due to the life insurance element. In addition, the premium plus the maturity payments to the policyholder and the life insurance payout to the beneficiaries are exempt from tax under section 10(10D) of the Act. These allow considerable savings, thus securing your future.

To sum up, in an already unpredictable market scenario governed by forces such as the pandemic, inflation and political factors, the stability offered by a guaranteed return plan is a rare virtue. Therefore, this easy-to-understand plan for those with a low appetite for risk offers exceptional features that ensure money growth while protecting our family’s financial security and all on your comfortable terms. But don’t forget to compare different plans online and also analyze them against term deposits for better understanding. As always, beyond that, read the fine print carefully before making any investment decisions.

(By Vivek Jain, Head of Investments, Policybazaar.com)

Disclaimer: This is the personal opinion of the author. Readers are urged to consult their financial advisor before making any investment.