Here's all you need to know about guaranteed return plans

Amidst the fluctuating market scenario and low interest rate environment, people are in search of products with a promise of guaranteed returns. Over the last few years, there has been a significant drop in the interest rate offered by banks on fixed deposits which have put financial planning, especially of the middle-class Indian at great risk. The rate reduction in interest given on bank deposits has greatly impacted the financial planning of millions of households.

“For Indian investors, short-term market volatility is not a matter of great concern as they mostly prefer long-term investment products. The actual risk lies in falling woefully short of the required corpus for one-time expenses like a child’s education, marriage or even retirement. For unprecedented times like these life insurance products that offer guaranteed returns are the best solution,” said Vivek Jain, head – investments at Policybazaar.com.

It is always important to have clarity on the amount of return expected after a fixed period of time. Moreover, the life protection element under these products ensures that even if the policyholder dies, the dependents will always get the promised money.

Assured returns

In the last six months, the repo rate has reached a seven-year low of 4%. For investors relying on bank fixed deposits for long term savings, this means that bank deposits may fail to provide you with adequate returns. Besides, the story doesn’t even end here.

“Several economists and analysts are expecting a further reduction in the repo rates in the coming few years, resulting in the possibility of further reduced returns. If you talk about numbers – the difference between the annual interest earned on a bank fixed deposit of Rs 5 lakh as the rate of interest slipped from 8.75% to 5.50% in the last 3 years is about Rs 15,000 in just one year,” Jain said.

Over a period of 20 – 25 years, the constant drop in interest rates will significantly alter your financial savings plan. The declining interest rate on bank fixed deposits poses great risk to customers with low risk-taking appetite, limited understanding of the stock market, and especially those settled in non-metro locations.

Guaranteed return products

Considering the ongoing market scenario, the time is right for customers to understand and evaluate alternate investment options. One such category of products that customers must make a part of the investment kitty is Guaranteed Returns Plans that promise guaranteed returns, irrespective of the changes in market conditions and interest rates.

“Guaranteed Returns Plans come with a ‘life protection’ component that makes these plans better than the rest in the niche. In comparison to bank FDs, guaranteed return products offer better returns on a tax-adjusted basis. Apart from a promise to give a fixed return, these plans also come with the guarantee of payout in case of the sudden demise of the policyholder,” Jain explained.

These plans are more or less a sure-shot way of accumulating an adequate corpus and providing financial protection to your family. A guaranteed return product also gives you an initial tax benefit, fixed and tax-free returns, and a life protection cover. When the life assured dies during the term of the policy i.e. before date of maturity, proceeds under the policy are payable as a claim to the nominee.

When planning to invest in guaranteed return plans, you can also consider buying it online as they offer a slightly higher payout. “For instance, say you invest Rs. 10,000 per month for 10 years under ICICI Prudential Life Insurance’s Guaranteed Income for Tomorrow plan. Now, if you buy this plan online, you will receive a monthly payout of Rs 9,469 which comes to Rs 1,13,628 annually, but if you buy the same plan offline, you will receive a monthly payout of Rs 9,239,” Jain pointed.

He further said, “When buying the plan online, you receive Rs 2,760 more per year and over a period of 10 years, you receive approximately Rs 27,600 more than offline plans. At maturity, for a plan bought online, you receive a total sum of Rs 11,36,330 while the same plan bought offline gives you Rs 11,08,622 at maturity. When buying guaranteed return plans online, the customer receives approximately 2.5% extra income on the corpus invested.”

Similarly, say you invest Rs 10,000 per month for 10 years in HDFC Life’s Sanchay Plus guaranteed returns plan. Now, when you buy this plan online, you will receive a monthly income of Rs 8,946 over a monthly income of Rs 8,433 when bought the plan offline. Over a period of 25 years, you receive a total payout of Rs 39,19,875 when you buy the plan online and Rs 37,29,825 if you buy the plan offline. By investing in the plan online, you receive Rs 1,90,050 extra than offline as the total payout amount.

However, make sure to do a fair bit of research and draw clarity after reviewing your personal financial goals.