As interest rates on Bank Fixed Deposits (FD) and Public Provident Fund (PPF) – the two most sought after long-term saving instruments – continue to slide down to a decade now, it is time to switch to products that promise guaranteed returns. The PPF- which offered 11 – 12 per cent interest per annum in the 1990s, today merely gives 7.1 per cent interest. Similarly, the rate of interest on bank fixed deposits has fallen from 8.5 per cent in the year 2014 to 5.4 per cent in the year 2020. These interest rates are further expected to fall by 3 – 5 per cent in the next few years as the country evolves into a completely developed economy. With such low interest rates on offer, customers are on the lookout for products that offer better returns for at least 20 – 25 years. Considering the current market scenario, insurers that are offering a return between 5 – 6 per cent on the invested corpus are precisely serving the market need.

Invest in guaranteed return plans

The guaranteed return plans come with “Exempt-Exempt-Exempt (EEE) taxation benefit” which means there is no tax on the corpus invested, on accrual, and the maturity or payout amount. These products are the best pick for investors across all ages in comparison to post-tax returns offered by banks in the current market scenario, guaranteed return products give better returns. For instance, the long-term deposit interest rate being offered by most government banks is 5.4 per cent. Now, for a customer falling in the 30 per cent tax bracket, the post-tax returns on the invested corpus would come out even below 4 per cent. The guaranteed return products offer better returns often promising maximum IRR - the annual rate of growth investment is expected to generate – ranging between 5.3 and 5.8. The customers investing in guaranteed returns plan even get a life cover equal to 10 times the annual premium and this is why they attract traditional FD investors. For instance, if a customer invests Rs 2 lakh annually, on the sudden demise of the customer, the dependents will get a sum assured of Rs 20 lakh.

Some of the prominent insurers offering non-participating products to the consumers include HDFC Life’s Sanchay Plus. Under this plan, if a 30-year old individual invests Rs 5,000 per month with a policy term of 15 years and a payment term of 10 years, on maturity the consumer will get Rs 10.77 lakh as lump sum at an IRR of 5.61 per cent. Similarly, one may also choose to invest in Aditya Birla Capital’s Guaranteed Milestone Plan, wherein a 30-year-old individual by investing Rs 5,000 per month in a policy term of 20 years and a payment term of 10 years will get Rs 13.94 lakh on maturity as lump sum at an IRR of 5.51 per cent.

Annuity plans – for a secured retirement

People who are retiring in the coming 8 – 10 years and are looking for a secured investment option that guarantees them a fixed pension as a replacement of salary post retirement for them annuity plans may be the answer. Under an annuity plan, you pay a lump sum in the accumulation period and get regular payments as long as you live or for a pre-specified fixed period. Annuity plans are specifically designed to meet long-term retirement needs of people with a decent corpus for investment. An annuity plan allows you to lock-in the existing interest rate not just for a period of 10/15/20/25 years but your entire life. Say, if you are a 60-year-old individual and you buy an annuity plan where the annual payout comes to 6 per cent of the amount you invested. Now after a decade or even more, if the rate of interest declines to 4 – 5 per cent, you will continue to receive a payout at a 6 per cent interest rate up to your policy term – the one at which you invested. Moreover, annuity plans are an excellent way to tackle reinvestment risk and reduce the longevity risk as these plans guarantee you a fixed income for life or until your policy term.

The author is Head-Investments BU, Policybazaar.com.

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