Mostly, people seek good long-term investment options in order to escape the short-term market volatility. Investors also keep in view their non-negotiable life goals, such as retirement planning, children’s education or marriage or buying a home. Additionally, the interest rate reduction in fixed deposits over the past few years has certainly altered the course of financial planning for many.
A better option that combines a fixed interest rate, but gives the investor a higher return on their money is a guaranteed income plan. If you invest in these plans, they offer a return rate of 6% to 6.5% which is higher than the options we detailed out earlier. The interest earned is not taxable, which further grows your gains. Your funds are safe against market risks for a about 40-45 years, so you don’t have to worry about constant fluctuations, not in the near future, at least.
Here’s what makes guaranteed income plans work.
What Makes Guaranteed Income Plans Work
Higher, tax-free returns
Often, when we compare options, we go by the designated rate of return but ignore the hidden factors that have a significant impact on the actual value of the money. Factors like inflation and tax, which are often not taken into cognizance while parking one’s funds, are the ones that go on to define your real rate of return.
If we talk about the last decade, fixed deposits have seen a constant decline in interest rates and have only picked up recently. As India continues to be a developing country, the return rates on fixed deposits have come down from around 9% to nearly 5%. With the retail inflation rate skyrocketing, if you choose to keep your funds idle in the bank account, you’ll end up losing more returns than gaining. This will also have a long-term implication on your financial goals, as every sector has been hit hard by inflation.
Add the tax element to this, and the returns are further pushed down. For instance, if we talk about the interest rate in a savings account, it varies anywhere from nearly 3% to 4%, which is just not strong enough to withstand the soaring rate of inflation. Next, if we talk about the standard option of fixed deposits for many, it fetches approximately 5% rate of interest.
Again, as this is a long-term option, the growing inflation over the years will certainly take a toll on your hard-earned savings. And of course, the return that you gain here will be subject to taxation year on year. Depending on your tax slab, the actual return rate here further goes down.
This is where guaranteed plans come in.
Flexibility
When we talk about guaranteed return plans, the investors are advised to take the long-term route. This essentially means that one should have a view of at least 20-25 years while investing in the plan if they want to create maximum value out of their investment. However, the market also has new-age plans that provide the investor with a greater degree of flexibility.
So, even though guaranteed return plans are best known for offering the investor the option to lock the interest rate for a period as long as 45 years, there are plans that accommodate the investor’s wish for early withdrawals. Nonetheless, it’s important to understand how they work. For instance, under some plans, you can get an income for 45 years starting from the sixth year at a return rate of 5.74% which will be tax-free due to the life cover element. You gain a higher return than a taxable nearly 5% on a fixed deposit.
However, if you want to surrender your policy, you can do so and get the originally invested amount within the first five years. No surrender charges will be applied and you will receive your invested amount immediately.
Further, if you wish to surrender your policy during the income period, you will receive your money at a discounted rate of 7.5%. However, since you will also receive the income in this period, this is still a profitable bargain for you.This plan offers a high degree of flexibility and benefit to the investor.
Insurance amid these uncertain times
The past waves of Covid-19 have taught us ample lessons for a lifetime to brace up well in advance. As the pandemic continues to cause more uncertainty and loss of lives, it’s imperative to think above and beyond at a time like this.
What makes these plans the best bet for policyholders is the fact that they come with a life cover component. This investment-cum-insurance combination makes sure that you can have a good financial backing in your lifetime and also cast a robust safety net for your dependents even after your lifetime.
With new variants posing a fresh threat yet again, it’s best to stay financially prepared for any unforeseen circ*mstances. The insurance element in guaranteed return plans helps one secure their future. These plans come with a life cover of 10 times the annual premium which is paid out to the dependents in case of the unfortunate death of the policyholder.
To enhance your protection net further, you can even add riders like critical illness or personal accident cover to your policy. So, these plans don’t just secure your present, but also your future and the future of your dependents even in your absence.
Hedge against market volatility
It’s quite evident that the markets have been impacted by several developments in the last few months causing considerable volatility. Rising inflation, fuel prices, Russia-Ukraine unrest and Fed rate hike have been the key factors that have triggered instability in the markets across the globe. Investments, while a great option, might not be everyone’s expertise in a situation like this. Guaranteed return plans come to your rescue here. This works best for investors who cannot afford their funds to be subjected to any kind of market risks.
As the name suggests, these plans offer a guaranteed return on your investment and come with the zero risk element. Apart from getting you a higher return and keeping your original investment intact, they are a great gateway for reinvestment also since they offer a long-term guarantee of returns.
Even though the rates here are subject to revision, this won’t happen within the same contract, unlike provident fund or public provident fund. While banks allow you to invest in fixed deposits for 10 years, you can invest your money in these plans for 45 years. Also, while no other instrument, including fixed deposit, can guarantee a fixed rate of return beyond 10 years, these plans can offer a fixed interest rate for around 40 years. This ensures a longer, safer and more productive period for your invested money.
You can invest as early as possible to gain maximum benefits and can comfortably sail through various milestones in your life. Also, you have the option to invest in an income plan and receive a recurring income or you could opt for a lump sum benefit plan.
Bottom Line
Guaranteed return plans exemplify the popular principle of investing – keeping it simple. Fixed rate of return, ability to lock in for longer periods, tax free interest rate and little to no risk to your invested funds – these plans tick most boxes that an average investor is looking for, and are a great alternative to traditional options like fixed deposit.
If you don’t have an appetite for risk but are looking for investment options to make your money grow, these guaranteed return plans are your safest and best bet. Alternatively, if you are looking for even higher returns, you can still choose to diversify your investment portfolio by investing a certain amount of money into these guaranteed return plans. Do not forget to comb finely through policy details, and other important terms and conditions.
With the advent of online marketplaces, purchasing a policy has been made a lot simpler. You can save more as well if you buy online. Since there are ample options available at your fingertips, you can compare online and choose the best deal.
