India has traditionally been known for its savings-oriented culture. Fixed deposits are commonly considered when individuals think about structured savings options. Life insurance is another widely used financial planning tool.

A Unit Linked Insurance Plan (ULIP) combines life insurance coverage with market-linked investment components. This article discusses key differences between fixed deposits and ULIPs to help investors understand their features.

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 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, an investor deposits funds for a defined tenure at a predetermined interest rate*. At maturity, the principal and applicable interest are paid as per the selected payout option.

Also, in the wake of economic changes in the country, the RBI has slashed the repo rate to support the ailing economy. This has resulted in financial institutions reducing interest rates on fixed deposits.

ULIPs

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.

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 predictable returns and principal protection becomes a smart choice.

Apart from these, FDs offer the following additional benefits:

• Overdraft facility: Financial institutions may offer loans against FDs to their customers. The overdraft facility usually allows you to withdraw up to 75% 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.

Unit Linked Insurance Plans

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 usually 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 a ULIP is 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 of ULIPs is that they allow you to invest according to your risk appetite and return objectives. If you are risk-averse and are investing for your retirement, you may invest in bonds. If you have a moderate risk appetite, you may choose hybrid funds. Risk investors can invest in equity funds.
• Making saving a habit: Putting money into a ULIP every 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:

Conclusion

When comparing fixed deposits and ULIPs, it is important to recognise that they serve different financial objectives. Fixed deposits offer fixed returns as per the applicable interest rate and tenure, while ULIPs provide market-linked returns that depend on market performance.

The choice between the two depends on an individual’s financial goals, risk tolerance, and investment horizon. Investors should review their existing portfolio allocation before making a decision.

Shriram Fixed Deposit offers flexible tenure along with cumulative and non-cumulative options. Check out our website for more information.