FD vs Guaranteed Return Plans - Which Is Better And For Whom?

Customers looking for guaranteed fixed returns traditionally have been investing in a Bank Fixed Deposit or a Recurring Deposit.

With interest rates falling regularly for more than half a decade, and given that the returns on FDs are not tax-exempt, it has happened many a time that the net return received does not even beat inflation - which is one of the core purposes of making any investment.

For instance, the interest rate for a 5-year FD in HDFC Bank, when writing this article, was 5.75%. Now if you are in the highest tax bracket, then the effective interest rate post-tax will be 4.02%.  The urban consumer price index inflation during the same time was 6.72% Insurers have been offering long-term guaranteed return products for ages, and are pitching two advantages that make it more attractive today than Fixed Deposits. One, the Return on Investment (ROI) some of these guaranteed plans are able to offer especially for people younger than 35, is 30-50% higher than offered by FDs. What’s more, the returns generated are 100% tax-exempt. You can effectively make around 5.5% net of the tax return in a Guaranteed Plan instead of a Fixed Deposit.

In this article, we’ll compare the benefits offered by Fixed Deposits and Guaranteed Plans.
 

1. Guaranteed ROI
   Both plans offer guaranteed and secure returns. However, Guaranteed Plans generate better returns than Fixed Deposits, since they invest in secure avenues like Government or Treasury bonds to generate your rate of interest.
    
2. Tenure
   FDs usually provide a maximum tenure of 5 years. You can invest and reap such fixed returns in a Guaranteed Plan for 25-30 years.
    
3. Tax Benefits
   Investing in a Guaranteed Plan gives you three major tax benefits, unlike FDs. These tax benefits are laid down in the Income Tax Act of 1961 -
   a. Your investment, i.e., the premiums you pay are available for deduction under Section 80C.
   b. No taxation on accrual.
   c. No tax on the maturity value generated in the product under Section 10 (10D).
    
4.  Early exit
   While Guaranteed plans provide better tax-free returns and other benefits, you must know that these plans have a severe drawback when you exit early from these plans.
   ??If you withdraw from investing before the agreed schedule or want to withdraw the money you have invested prematurely, you will face major deductions and losses.
   On the other hand, the loss in FDs for early exit is very minimal - you just end up losing a certain percentage of the total return you were earlier agreed to make.
    

? Keep In Mind - Do Not buy A Guaranteed Plan For Financial Protection

Guaranteed plans will offer 10x coverage on the annualized premiums you will pay on the plan. So when you invest say Rs. 1 Lakh a year, you end up getting a cover of Rs. 10 Lakhs, which could be very low for many - and could distract the person from buying a larger cover to take care of his family’s financial security.

Guaranteed plans provide a supplementary financial cover that cannot substitute for full-fledged financial protection for your family. Look at the life cover provided in guaranteed plans, like free fries with a burger - simply as an additional benefit.

In case you are looking to provide financial security to your family, you must calculate the financial protection gap of what you possess vis-à-vis what you need with the help of an advisor and buy a term insurance plan.
 

? So, Final Take: How Can You Decide?

Based on the comparison made above, it's very simple that you need to make a decision based on your approach with regards to exit in this policy, i.e., whether you envision an early exit versus if you want higher tax-exempt returns and can commit to long-term systematic investment.
 

Go for a Guaranteed Return Plan if - 

• You are less than 35 yrs old, and
• You can commit to disciplined investment for 5-10 years in the policy, and
• You are willing to stay invested as per the schedule defined in the plan.
   

Choose a Fixed Deposit if - 

• You are above 50 yrs old since the returns will significantly reduce in Guaranteed Plans due to the high cost of life cover for a 50-year-old, OR
• You are not sure of being able to invest for multiple years in a disciplined way, OR
• You also envision a chance that you may have to withdraw these funds. 
   

So, this was all about Guaranteed Plans and Fixed Deposits. We hope the article helped you understand the differences between both investment avenues and you can now make an informed decision about which one you should choose.