Knowing that your investments will deliver a guaranteed amount can be reassuring, especially if you want to avoid losses and secure steady returns. For low-risk investors, two popular options are a Unit Linked Insurance Plan (ULIP) with a capital guarantee and a Fixed Deposit (FD). Both have their benefits, but which one fits your financial goals better? Let’s find out.  

What is a ULIP with a capital guarantee?

A ULIP with a capital guarantee, also known as Capital Guarantee Plan, invests your money in market-linked instruments. While your returns depend on market performance, the plan ensures 100% security on your invested capital, offering a guaranteed return at maturity. So, no matter how the market performs, you will receive your invested capital at the end of the policy term.

Additionally, these plans also offer life coverage, which offers a death benefit to the policyholder’s loved ones in case of an unfortunate incident during the policy term.

What is an FD?

FDs are term deposits offered by banks, post offices and Non-Banking Financial Companies (NBFCs). They offer a fixed interest rate for a predetermined tenure. With an FD, you know exactly what your returns will be at maturity, which makes it a safe and predictable investment option.

What are the differences between a ULIP with a capital guarantee and an FD?

1. Purpose
   1. A ULIP with a capital guarantee allows you to invest in the market and earn market-linked returns while also providing life insurance coverage to protect your loved ones.
   2. An FD, on the other hand, offers a low-risk way to save money and earn a fixed return at the end of the term.
2. Life cover
   1. A ULIP with a capital guarantee provides life cover along with wealth-building to ensure your family’s financial security in your absence.
   2. An FD does not offer any life cover.
3. Inflation protection
   1. A ULIP with a capital guarantee can offer inflation protection. The plan provides options for equity, hybrid and debt funds. A well-diversified portfolio of these funds can help you earn returns that outpace inflation over time.
   2. An FD may or may not offer inflation protection, depending on the return rate you qualify for. The rate of return varies by bank, tenure and your age and may not keep pace with inflation.
4. Tax benefits
   1. In Capital Guarantee Plans, investments are eligible for tax deductions under Section 80C of The Income Tax Act, 1961, allowing deductions of up to ₹1.5 lakh annually. Additionally, the maturity amount received is tax-exempt, provided the annual premiums paid do not exceed ₹7.5 lakh, subject to conditions under Section 10(10D) of the Income Tax Act, 1961. 
   2. An FD with a maturity period of at least five years qualifies for a tax deduction under Section 80C, but the interest earned at maturity is taxable.
5. Lock-in period
   1. A ULIP with a capital guarantee typically has a lock-in period of five years from the policy's start date.
   2. FDs also have a lock-in period and do not generally allow withdrawals until maturity. Early withdrawals usually incur penalties.
6. Flexibility
   1. ULIPs with a capital guarantee offer flexibility. Although you cannot withdraw your money before the lock-in period, you can switch between funds to capitalise on market opportunities.
   2. FDs do not allow you to modify your investment once it is locked in. The money remains with the FD issuer, and you have no control over it until maturity.

Which is the better option for your financial goals?

A ULIP with a capital guarantee can offer more benefits, including market-linked growth and life cover. It caters to various risk appetites with a mix of different funds. Additionally, the capital guarantee ensures that you will get your invested capital back, making it a suitable option if you are seeking both wealth creation and financial protection.

An FD, on the other hand, offers low risk and peace of mind with fixed returns. However, it does not provide life cover. While it can be a safe place to park excess funds, the investment is not as versatile as a ULIP.

Ultimately, the choice depends on your goals. If you are looking for wealth creation and life cover, a ULIP is the right option. But if you just want a safe place to park excess funds with guaranteed returns, an FD may be suitable.

Conclusion

It is important to evaluate your financial needs before making a decision. Understand the benefits and features of both options and see which one aligns best with your goals. You may also consider having both a ULIP with a capital guarantee and an FD in your portfolio to cater to different financial objectives.

Disclaimer

Tax benefits may be available as per prevailing tax laws. Tax benefits under the policy are subject to prevailing conditions and provisions of the Income Tax Act, 1961. The tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details.