India is a savings economy. We have always been taught the discipline of saving money for the future. When we talk about savings, the first investment avenue that comes to most people’s minds is a ‘Fixed Deposit.’ For a secure future, Indians also allocate a significant amount of their income to life insurance. An interesting product that combines life insurance benefits and regular investment in financial markets is a ULIP or a Unit Linked Insurance Plan.
Let’s discuss FD vs. ULIP investment in detail
Fixed Deposits
They have long been the ‘Keep it and Forget it’ savings option for Indians as they are expected to offer security and predictability. The advice of investing in FDs has been passed onto us as cultural wisdom, and thus it is a more widely known and acceptable financial product.
In a fixed deposit, you put your money in a bank account for a fixed tenure at a predetermined rate of return. At maturity, you shall receive the amount invested along with the compound interest on the principal. Historically, fixed deposits in India have given investors 10-12% returns per annum. But that era is probably never coming back.
Also, recently, in the wake of the Covid-19 pandemic, the RBI has slashed the repo rate aggressively to support the ailing economy. This has resulted in banks reducing interest rates on deposits. In a rare occurrence, the SBI fixed deposit interest rate is now at par with its savings account interest rate at a low of 2.9%. However, small finance banks and certain non-banking financial institutions still offer much higher interest rates (going up to 8% p.a.).
ULIPs
Hence, many people are attracted to move towards products that offer a higher rate of return than their fixed deposits. A ULIP is one such product. A ULIP combines the features of life insurance and investing. The money paid as a premium for a ULIP is partly allocated towards life cover and partly towards investments in financial markets through equity, debt, or hybrid instruments. A ULIP that invests in equities is expected to give higher returns than FDs of large banks, making them an attractive long-term investment avenue for investors.
So you would ask, is a ULIP better than a fixed deposit for saving/investing money?
Let’s look at the benefit of fixed deposits and ULIPs, and then compare ULIPs and fixed deposits.
Fixed Deposit benefits:
Before switching to other investment avenues based on returns, there are some factors that one must keep in mind:
- For a risk-averse investor, fixed deposits would continue to remain an attractive investment vehicle as they come with capital preservation benefits.
- Speaking of portfolio diversification, when markets are at all-time highs, fixed deposits may allow investors to diversify away from markets and provide reasonable returns.
- When financial markets are volatile, choosing a fixed deposit that offers guaranteed returns and principal protection becomes a smart choice.
Apart from these, FDs offer the following additional benefits:
- Overdraft facility: Banks may offer loans against FDs to their customers. The overdraft facility usually allows you to withdraw up to 85 or 90% of the FD value. The interest rate charged would be 1-2% higher than the applicable FD rate. Overdraft against FD is available at a lower interest rate than personal loans and pre-approved loans against credit cards.
- Tax benefits: TIncome tax deduction can be claimed by investing money in a five-year FD scheme under Section 80C of the Income Tax Act, 1961. One can claim up to Rs. 1.5 lakh as a deduction in a year by investing in a tax-savingfixed depositaccount.
- Additional benefits: These days, banks are offering various facilities with FDs like insurance and medical benefits.
Unit Linked Insurance Plans benefits (ULIPs):
ULIPs transform basic life insurance products into investment products. Thus, apart from providing insurance cover, these products may help in achieving your financial goals. Some benefits of ULIPs would be:
- Income tax benefits: ULIPs give a dual tax benefit. They are eligible for a tax deduction under Section 80C. Under Section 10(10D) of the Income-tax Act, returns on maturity are exempt. They also give tax-free payouts in the event of an unforeseen event.
- Life cover: One of the essential benefits of aULIPis that it offers life cover and investment benefits. Hence, it not only creates wealth. These plans also ensure your family will receive financial support in case of an unforeseen event.
- Wider investment choices: Another benefit ofULIPsis that they allow you to invest per your risk appetite and return objectives. If you are risk-averse and are investing for your retirement, you may invest in bonds. If you are someone with a moderate risk appetite, you may choose hybrid funds. Risk investors can invest in equity funds.
- Making saving a habit: Putting money into aULIPevery month teaches the discipline of regularly putting aside money for your future instead of saving only what is left after paying for your expenses.
- Market-linked returns: While you may be paying the premium for your life cover, you also get the benefit of investing in market-linked funds that allow you to enjoy any upside in equities and bond markets, unlike the fixed return from FDs.
Now, let’s look at the difference between fixed deposit and Unit Linked Insurance Plans:
| Particulars | Fixed Deposits | ULIPs |
|---|---|---|
| Lock-In Period | No lock-in period, but if the amount is withdrawn before the due date, the bank may charge a penalty, leading to a loss in interest. | ULIPs have a lock-in period of 5 years. |
| Flexibility | Fixed deposits do not offer this facility. | ULIPs offer you the flexibility to change the allocation of the fund based on the market outlook. |
| Death Benefits | Fixed deposits do not provide any death benefits. | Since life insurance is a part of a ULIP, there would be a sum assured payable to the nominee on the policyholder’s death. |
| Guaranteed Returns | The Fixed Deposit Interest rate is guaranteed. They also provide capital protection. | No guarantee of returns on the investments. Returns are subject to market volatility. |
| Charges | No such charges applicable for FDs | ULIPs have premium allocation charges, administration charges, and fund management fees reduced from the returns generated from the investment. |
| Taxation benefits | Tax exemption only on the investment amount. The returns are fully taxable. | You can avail of tax deductions on premiums as well as the maturity amount. |
Conclusion
When we compare Fixed Deposits v/s ULIP investment, it is important to understand that fixed deposits provide a lower return but are very low-risk products. On the other hand, ULIPs are market-linked products and can be very risky and volatile. Since returns are market-linked, ULIPs have the potential to deliver better returns than fixed deposits. However, there is no guarantee of performance.
Thus, if your goal is wealth preservation with low risk, you may opt for FDs, whereas, for the goal of wealth creation, ULIPs may be a better option. Therefore, investors must assess their risk appetite and take into consideration their current portfolio allocation.
ULIPs have often been criticised for their higher expense over plain, vanilla insurance, and mutual fund products.
On the other hand, fixed deposits have been losing their sheen as some public sector banks now offer a fixed deposit interest rate that does not allow investors to generate inflation-beating returns over the long run. In such a case, investors may consider opting for FDs of certain Small Finance Banks and NBFCs like Shriram Finance Fixed Deposit that offer higher interest rates starting from 9.40%* p.a. .This may allow investors to enjoy the safety of a Fixed Deposit and also earn a better return.
