It was about this time last year when the Reserve Bank of India lowered the repo rate by 75 bps (basis points) to 4.4% – a historic low – in an effort to mitigate the economic impact caused by the epidemic.
The announcement had a secular impact on most savings schemes with bank fixed deposits (FDs), which had the most impact. Soon after the deduction, the rates of savings schemes were also reduced.
The interest rate on bank fixed deposits is declining, from 8.5% in 2014 to 5.4% in 2020. With a steady decline in rates, these products have now become less attractive among customers who are looking for products that guarantee returns over the long term. .
One idea behind any investment is to at least beat the longevity risk and ensure that real returns are guaranteed.
It is important to know that as the economy develops, the returns on the products offered by the government will keep decreasing.
Financial future
Over the past year, the life insurance-product category has become the most preferred financial solution due to its role in securing the family’s financial future.
Regarding the economic slowdown caused by the epidemic, the majority of the population today believes that it is important to have a long-term guarantee-return scheme in the financial portfolio. A major advantage with investing in guaranteed-return products is that the downside of the portfolio will be quite limited. In case of market volatility, when market-linked products underperform, fixed / guaranteed-return products continue to deliver the same returns. With such products, you can lock in the interest rate offered for a maximum period of 45 years.
liquidity risk
Most people buy guaranteed-return products – also known as savings-plus protection plans offered by insurance companies – for the purpose of preserving and leveraging assets for the future. However, often clients have to set aside investments made for long-term goals for financial difficulties such as unexpected exertion due to health emergencies.
This process of terminating insurance-cum-savings plans before maturity is called surrender. Most investment instruments available in the market do not allow you to save during the mandatory lock-in period, while those that allow you to surrender your policy charge a hefty fee.
To tackle this drawback of savings-plus protection plans, insurers have come up with, or will soon introduce, a new version of guaranteed-return plans, under which you can easily change your policy in the first five years in case of a financial emergency. Can surrender, without paying any surrender fee. Customers get back 100% of the invested capital without any deduction.
tax benefits
The Guarantee-Return Scheme comes with triple-taxation benefits. There is no tax on the amount invested, accrual (the amount that grows) and the maturity amount. However, bank FDs lack such facilities.
For example, Rajiv Nigam, earning v 20 lakh per year, decides to buy an existing guaranteed-return plan by investing ₹ 10 lakh as a lump sum. On this, he will save ₹ 46,800 in tax benefits. Further, on maturity, Shree Nigam will receive ₹ 40.4 lakh which will be completely tax-free.
If Mr. Nigam had invested the same amount in a bank FD, though his invested amount would have been tax-free, he would have to pay tax on the maturity amount as the income from the FD is not tax-free.
On the maturity amount, Shree Nigam will be required to pay ₹ 9.11 lakh in tax – as it would fall under the 30% bracket.
By investing in the product, Shree Nigam will save a total of 9.58 lakhs. Guaranteed-return products provide promising IRRs – an annual rate of investment may arise – between 5.3% and 5.8%.
Life cover
Often an unfortunate event such as the sudden demise of the family breadwinner proves to be a distress for financial dependents in more ways than one. To address such situations, the guaranteed-return scheme is a holistic solution.
They assure protection against unexpected financial emergencies as well as long-term, guaranteed income.
Customers investing in such schemes get a life cover equal to 10 times the annual premium. Therefore, these schemes also attract the attention of customers who traditionally invest in FDs.
(The author is the head of investment, PolicyBazaar.com)
.
Leave a Reply