Low-return FDs underperform against ULIPs

For risk-averse investors who want to save on income tax, tax-free bank fixed deposits (FDs) are usually one of the main investment tools. However, the 50-basis point repo rate cut announced by the RBI in Sep 2015 is expected to impact fixed deposit rates across all banks. With SBI announcing cut in deposit rates by 25 basis points (effective from 5th October 2015), more banks are likely to follow suit. Thus, the rate of return from new tax-saving fixed deposits would surely take a beating. This raises the question: is there an investment instrument that can replace tax-free bank deposits and deliver on returns, capital security while offering tax-saving benefits?

ULIPs: An Alternative to Bank FDs

Unit-linked Insurance Plans (ULIPs) give investors the benefit of both investment and insurance under one umbrella. A part of the policy premium is used to provide you with life cover while the rest is used to invest in equity and/or debt markets. Just like mutual funds, you will be allotted units, which will have a net asset value (NAV) assigned to them. These values will determine the rate of returns of a ULIP plan.

How are ULIPs better?

• Higher tax savings: ULIPs are tax friendly as their premiums qualify for tax deduction under Section 80C of the Income Tax Act while the maturity amount is tax free under section 10(10)D. In case of tax saving deposits, only your investment amount would qualify for deduction under Section 80C. The interest earned from such deposits would however be taxable.
• Higher returns: Bond prices tend to go up when interest rates are falling. As more rate cuts are expected from RBI due to decreasing inflation, more capital appreciation can be expected from bonds. Thus it makes more sense to invest in debt-oriented ULIPs, after the recent repo rate cut. You can also opt for equity or balanced ULIP if you have higher risk appetite.
• Life Cover: ULIPs provide life cover while tax saving deposits do not provide any. According to the IRDA guidelines of 2010, ULIPs must provide life cover of at least 10 times of the annualized premium.

The below table shows how debt market and equity ULIPs outperform tax-free fixed deposits (Click here to know more):

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.

As above, for investor looking to take low risk and looking for better returns could consider ULIPs as a good option.