In India, people learn about the importance of savings at an early age from their parents. When it comes to savings, most people prefer keeping their surplus cash parked in a bank fixed deposit. It is one of the most popular and preferred savings avenues in India because it provides 100% capital security, and you get guaranteed returns at the end of the deposit tenure.
Apart from parking their savings in FDs, many Indians purchase a robust life insurance policy to secure their family’s financial future. However, what if you had a chance to combine insurance and investment under a single payment instead of handling two different financial instruments? Surprised, right? Well, this is exactly what ULIPs (Unit Linked Insurance Plan) offer.
Since the advent of the ULIP plan in the market, there has been a long-standing debate if ULIP is better than FDs or vice versa. So, in this write-up, let us understand the difference in detail.
What is a Fixed deposit?
Fixed Deposit is one of the most popular investment avenues. It is a long-term scheme where you park your funds and forget it until the end of the deposit period. You can choose the deposit period to suit your needs. It can range from 5-20 years or more. At the end of the term, you get the full initial deposit amount and the interest earned over the years in a lump sum after deducting the applicable taxes.
Over the years, the interest rate on fixed deposits has reduced significantly. Today, the fixed deposit interest rate is at par with the savings account interest rate; it can be as low as 3%. Some of the NBFCs (Non-banking financial companies) offer higher interest rates at about 6-7%.
What is ULIP?
ULIP is a unique financial product. It combines the benefits of life insurance and investment. Primarily an insurance product, it lets you save for your long-term goals and get valuable returns.
When you pay the premium for your ULIP plan, the insurance company divides it into two parts. One part is used for offering life insurance coverage. The other part is invested in different assets like stocks, government bonds, debt funds, equity funds, and hybrid funds.
Since the funds are invested in the money market, the returns potential from ULIPs is much higher than the returns you get from FDs. If you compare the average ULIP returns with FD, historically, then ULIPs offer a much higher return in the range of 10-12% for an investment tenure of 10 years or more. The longer you stay invested in ULIPs, the better returns you get.
Benefits of fixed deposits
FDs are the most suitable savings options for risk-averse investors. Once you deposit the money in your FD account, it remains safe till the end of the deposit tenure.
The returns you get from an investment in FD are assured, and it is fixed at the time of starting the FD account. The market movement does not have any bearing on the returns.
Many banks nowadays offer overdraft facilities to fixed deposit holders. You can withdraw up to 80% of the FD value for emergency needs. The interest charged on the withdrawal would be 1-2% more than the interest you earn from FD. However, the overdraft interest is much lower than loan on credit card or personal loan.
Benefits of ULIPs
The biggest benefit of ULIP is that it provides you with life cover. It not only helps you create wealth but also guarantees the safety of your family and provides them financial support if something happens to you.
Unlike FDs, the returns you earn from ULIP investment are tax-free. Also, the premium you pay is eligible for deduction up to Rs. 1.5 lakh in a financial year under Section 80C of the IT Act.
ULIPs provide a wider investment choice. You can invest in different funds of your choice to suit your risk-taking capacity and financial goals.
Investing in ULIP teaches you to be financially disciplined as you keep investing regularly.
Thus, because of the life cover, higher returns potential, wide investment choice, and tax benefits, ULIPs are a better savings avenue than FDs.
Click here to know more about Kotak Life ULIP Plan: https://www.kotaklife.com/online-plans/ulip-plan
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