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?

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Top ULIP Funds
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
1,663 Cr
Returns
26.72%
Returns
27.01%
Highest Returns
Returns
20.76%
Get Details
2,894 Cr
Returns
24.45%
Highest Returns
Returns
22.83%
Returns
18.66%
Get Details
2,337 Cr
Returns
23.41%
Highest Returns
Returns
19.4%
Returns
17.94%
Get Details
961 Cr
Returns
20.27%
Highest Returns
Returns
18.65%
Returns
17.15%
Get Details
6,464 Cr
Returns
19.12%
Highest Returns
Returns
17.41%
Returns
16.85%
Get Details
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
11,380 Cr
Returns
24.25%
Highest Returns
Returns
23.2%
Returns
21.58%
Get Details
1,340 Cr
Returns
30.17%
Highest Returns
Returns
23.17%
Returns
19.65%
Get Details
5,651 Cr
Returns
29.27%
Highest Returns
Returns
26.75%
Returns
19.47%
Get Details
4,058 Cr
Returns
26.02%
Highest Returns
Returns
19.28%
Returns
19.28%
Get Details
5,938 Cr
Returns
24.72%
Highest Returns
Returns
18.51%
Returns
18.52%
Get Details
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
241 Cr
Returns
13.58%
Returns
14.47%
Highest Returns
Returns
12.81%
Get Details
344 Cr
Returns
13.28%
Highest Returns
Returns
12.53%
Returns
12.17%
Get Details
523 Cr
Returns
10.86%
Returns
10.83%
Returns
11.04%
Highest Returns
Get Details
836 Cr
Returns
13.3%
Highest Returns
Returns
11.91%
Returns
11.02%
Get Details
21 Cr
Returns
13.59%
Highest Returns
Returns
11.77%
Returns
10.81%
Get Details
Fund Name
AUM
Returns (in %)
3 Year
5 Year
10 Year
487 Cr
Returns
19.06%
Highest Returns
Returns
16.57%
Returns
16.12%
Get Details
243 Cr
Returns
7.25%
Returns
8.16%
Returns
9.18%
Highest Returns
Get Details
777 Cr
Returns
5.17%
Returns
7.26%
Returns
8.29%
Highest Returns
Get Details
305 Cr
Returns
5.9%
Returns
7.06%
Returns
8.07%
Highest Returns
Get Details
466 Cr
Returns
4.96%
Returns
7.46%
Returns
8.05%
Highest Returns
Get Details

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.

Invest more and Get more with ULIP Plan Invest more and Get more with ULIP Plan

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

  Tax free deposits ULIP (Debt/Government securities) ULIP (Equity/Market linked)
Initial investment Rs 50,000 Rs 50,000 Rs 50,000
Interest rate 8%-8.5% 7.5–9.5% 12–24%
Value after 5 years Rs 76,100 Rs 78,700 Rs 1,46,000
Tax paid on returns Rs 7,842 NIL NIL
Returns after Tax Rs 68,200 Rs 78,700 Rs 1,46,000
Rate of returns after tax 6.03–6.44% 7.05–9.5% 12–24%
Life Cover N.A. Available Available
Minimum investment tenure 5 years 5 years 5 years
Tax saved on investment Rs. 15,000 Rs 15,000 Rs 15,000

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.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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