A major worry that continues to bother us day in and day out is saving for our and our family’s future. From paying for our children’s higher education and marriage to securing our retirement future or the home loan we have taken out, fulfilling these long term financial goals are extremely important and require systematic saving and investment. Having a plan to invest your savings that not only is safe from the fluctuations of the market but also doesn’t corrode in value given the rise in prices can be extremely tricky. While until a few years ago, we relied on just investing in fixed deposits to ensure guaranteed returns, the situation is very different now.
It comes as no surprise that the average Indian investor has had a long love affair with fixed deposit schemes. Safe and guaranteed returns have been the long-standing selling point of fixed deposits and investors in the past have blindly adhered to its benefits. However, as per data released by the Reserve Bank of India in January 2019, the share of fixed deposits has been falling. Experts believe that periods of excess liquidity have prompted banks to cut the rates of return offered on fixed deposits, pushing investors to flock away from the once very popular and “safe” investment instrument.
Another cause of worry for investors who are saving for the long term future of their families is the constantly changing rates of interest due to the transition of the Indian economy. In fact, just a few weeks ago the Monetary Policy Committee (MPC) of the Reserve Bank of India cut the repo rate by 25 basis points to 6.25%. Such repo rate cuts lead to a fall in the deposit rates and this alongside the historical fact that while transitioning from developing to developed countries, interest rates in a country tend to decline are pushing investors to protect their investments.
Figure: World Real Interest Rates (Percent)
Additionally, according to data provided by the International Monetary Fund about global interest rates, we see that since the great financial crisis of 2007/8 long term real interest rates have declined steadily in developed economies. Asian countries are no exception to this trend, with both advanced and emerging markets in Asia experiencing the decline.
Figure: Selected Asia: Impact of Demographics on 10-Year Real Interest Rates
In fact, the data goes on to further predict that given the declining youth dependency in a relatively young country such as India, there is likely to be a further decrease in interest rates in the upcoming years. Hence, investors who are saving for long term goals such as their children’s education, marriage, a home or are simply saving to provide for the future of their family, require a plan that locks in the current rate of interest for the future. This is a must in their portfolio. Non-participating insurance policies offer just this for investors, as the returns are guaranteed. This means that investing your savings in such a plan will not only give you an effective rate of return higher than the most investment instruments but also reduces the reinvestment risk you face. Since such a product locks your returns for the future you do not have to worry about reinvestment. In the case of other short term investments you have to eventually reinvest your returns and the interest rate you get at that time time may not be the same as the last time you invested.
Interest Rates in India over the years. Source: RBI
Additionally, another reason why people are shying away from other investment instruments is that they are taxable. For instance, if you opt for fixed deposits (which give an average return between 6.75%-7%) and you fall into the 30% tax bracket, the effectively the rate of return you are getting on your investment is 4.9%, which is much lower than that offered by other investment instruments. In fact, as of April 1st, 2018, most investment options also have a long term capital gains (LTCG) tax applied to them, further reducing their real rate of return for investors. However, this is not the case with investments in insurance policies, under which the premiums you pay up to Rs. 1,50,000 are exempt from tax under Section 80(C) of the Income Tax Act. In fact, even the maturity amount of your investment is exempt from taxation under Section 10(10D) of the Income Tax Act.
One of the most common metrics used to compare insurance policies is referred to as the Internal Rate of Return (IRR), which measures the rate of return on an investment excluding external factors such as inflation, cost of capital and other financial risks. Other policies on the market include HDFC Sanchay which offers an IRR of 5.94%, Tata Fortune Guarantee with an IRR of 5.91%, Kotak e-Assured plan with an IRR of 5.67% and Edelweiss GCAP with an IRR of 5.66%. Edelweiss Tokio Life – Elite Plus plan offers an IRR of 6.07%, which is higher than any other similar product in the market
As investors, we strive to achieve the right balance in our portfolios of equity, debt, and market-linked instruments. While several factors such as your financial needs, priorities and income influence your portfolio, it is undoubtedly wise for every investor to invest some of their savings in a non-participating insurance plan that offers you a guaranteed sum assured, while also offering you returns higher than most other investment instruments in the market.
Edelweiss Tokio Life – Elite Plus is such a non-linked, non-participating life insurance plan, which aims to protect the financial future of your family. Only in the market for a very short period, the Edelweiss Tokio Life – Elite Plus plan is an opportunity that you do not want to miss out now. The plan offers you a limited time opportunity to add a guaranteed return instrument to your investment portfolio that offers you guaranteed long term returns up to 6.1% (20 years) higher than any instruments, which are tax-free on maturity.