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Why ULIPs Are Better Than FDs?

IndianMoney.com Research Team | Posted On Sunday, June 21,2009, 09:39 AM

Why ULIPs Are Better Than FDs?

 

 

An investment gives you financial freedom. If you invest your money from the beginning, you need not to worry about the future financial necessities. As future is uncertain, and there may be a situation in your life where you require a large amount of money to get out of that situation with minimal loss. So to effectively protect yourself from such type of situation, you must inculcate the habits of saving and investing. It may be because of your children's education, marriage or medication.

Let it be anything which demands lot of money, you may outdo it if you have invested your money from the beginning itself. Hence, investment gives you more financial freedom to rely upon. If you have a desire for having a luxurious apartment and a luxurious car of your own, then it is obvious that these desires may be fulfilled by a planned investment and savings. As you invest more, you tend to become richer. And as you become richer, you may find no difficulty in achieving your personal goal. Achieving personal goals is the essence of your success in every aspect of your life.

Why ULIPs Are Better Than FDs?

A good investment strategy requires choosing the right mix of safe and risky investments. Among safe investments, fixed deposits are the most popular. But think before investing in FD because there are some other investment avenues that provide you much better returns such as ULIPs and Mutual Funds. Following are the factors that you have to consider before investing in FD; 

  • What is the Rate of return you need to satisfy your future needs?
  • Whether the returns generated by FD are sufficient to meet your future financial needs?
  • Is there any other better investment option than FD?
  • Tax benefits on the returns
 
With FDs you deposit a lump sum of money for a fixed period ranging from a few weeks to a few years and earn a pre-determined rate of interest.  In ULIPs you invest money regularly and after a period of time you will receive the lump sum amount. The return on ULIPs will be normally greater than the return on FD. Following illustration will help you to understand the return on FD and ULIP.
 
See Also: Unit linked insurance plan

Interest Rate on FD

Bank
Upto 1 year
Upto 2 year
Upto 3 year
Upto 4 year
Upto 5 year
ICICI
7.25%
7.75%
7.75%
7.75%
8.25%
Canara
7.25%
7.50%
6.00%
8.00%
8.00%
SBI
7.00%
5.00%
5.00%
7.25%
7.75%
HSBC
5.00%
5.50%
6.25%
6.25%
7.50%
Citi Bank
3.35%
3.75%
3.75%
7.00%
7.00%
 
  • If you are investing in FD for 1 year you will get a maximum of 7.25% return
  • If you are investing in FD for 2 year you will get a maximum of 7.75% return
  • If you are investing in FD for 3 year you will get a maximum of 7.75% return
  • If you are investing in FD for 4 year you will get a maximum of 8% return
  • If you are investing in FD for 5 year you will get a maximum of 8.25%  return

 

ULIP Returns

Company
Fund
Last 1 year
Last 2 years
Last 3 years
Birla Sun Life
Creator
21.40%
18.40%
19.30%
Birla Sun Life
Balancer
20.60%
15.80%
14.70%
ICICI Prudential
Balancer II
10.20%
11.30%
13.70%
HDFC Life
Time Flexi Growth
6.50%
8.50%
12.90%
HDFC Life
Balanced Managed
6.40%
8.10%
12.50%
 
 
 
 
 
 
 
 
ULIPs are always given more return than FD to the investors. It is always a better option to the investors as it is generating comparatively more return than FD.
 
Example:
Let us understand the performance of FDs and ULIPs with the help of following example;
 
Mr. Rahul is working with a multinational software company; he wants to save a good amount of money for his child’s education. He is looking to invest his money in a profitable avenue so that he can withdraw back his money with huge returns after a period of five years. He has approached some financial Planners and most of them have guided him to invest in two different avenues such as Fixed Deposit and ULIP. At last he decided to invest Rs, 1,00,000 every year in ULIP and Rs. 1,00,000 every year in Fixed Deposit. But in FD he doesn’t have the option to invest every year. So he has to deposit Rs. 100000 for one year. At the end of first year he has to withdraw the money and again he has to invest Rs.100000 plus last year’s return (i.e. Rs.100000+Interest) in the second year. Below given table will help you to find out the returns generated from both the investments.  
 
(In this example we have considered the average return from FD as 7% and Average return from ULIP as 14%)
 

Returns On Fixed Deposit (FD)

Above given table shows that the return from FD over a period of 5 years is Rs. 6,15,329.07. If Rahul is investing for a period of 10 years the return will be Rs. 14,78,359.93. Compared to ULIPs Fixed Deposits doesn’t carry any charges like Allocation charges or Fund Management charged. But on the other hand the return generated is very less moreover he has to pay tax on the returns. The interest rate on FD is taken as 7% because you cannot invest Rs. 100000 every year in FD. So you have to invest for 1 year after that you have to withdraw it and reinvest (i.e. withdrawn amount + 100000).
 

Analysis of Returns

ULIP and FD: Returns Over a period of 5 years

Return on ULIPs – Rs. 6,88,851.14
Return on FD – Rs. 6,15,329.07
 
(By looking at the figure we can make out that the performance of ULIP is much better than the performance of FD)
 

ULIP and FD: Returns Over a period of 10 years

Return on ULIPs – Rs. 19,32,922.87
Return on FD – Rs. 14,78,359.93
 
(By looking at the figure we can make out that the performance of ULIP is much better than the performance of FD)
 

Difference in Ulip and FD Returns 

Investment
5 Year Return
10 Year Return
ULIP
6,88,851.14
19,32,922.87
FD
6,15,329.07
14,78,359.93
Difference
73522.07*
454562.94**
 
*Return on ULIP is Rs. 73522.07 more than the return on FD
** Return on ULIP is Rs. 454562.94 more than the return on FD
 
Return over a period of 5 years = 6,88,851.14 - 6,15,329.07 = 73522.07
Return over a period of 10 years = 19,32,922.87 - 14,78,359.93 = 454562.94
 

ULIP and FD: Absolute Return

To find out the absolute return on the investment we should deduct Tax from the actual return. From the below given table we can clearly find out the absolute return on ULIP and absolute return on FD.
 

ULIP and FD: Over a period of 5 years

Particulars
ULIP
FD
5 Year Return
6,88,851.14
6,15,329.07
Tax (30%)
Nil*
1,84,598.72
Absolute return
6,88,851.14
4,30,730.35
Profit of Investing in ULIPs
Rs. 2,58120.79
*Returns on ULIPs are Tax free
 

ULIP and FD: Over a period of 10 years

Particulars
ULIP
FD
10 Year Return
19,32,922.87
14,78,359.93
Tax (30%)
Nil*
443507.98
Absolute return
19,32,922.87
10,34,851.95
Profit of Investing in FD
RS. 8,98,070.92
*Returns on ULIPs are Tax free
 
At the end of 5th year Rahul will receive Rs. 6,88,851.14 fromULIPs and Rs. 4,30,730.35 from FD. The return from ULIP is Rs. 2,58120.79 more than the return from FD. If he is investing for a period of 10 years at the end of the term he will receive Rs. 19,32,922.87 from ULIPs and Rs. 10,34,851.95 from FD. The return from ULIP is RS. 8,98,070.92 more than the return from FD.
 

Why ULIPs are the best?

Unit-linked insurance plans have caught the fancy of investors in urban centres. ULIPs not only provided life cover, but also brought in a lot of transparency in the way the policyholders' money is invested. Birla Sun Life Insurance Company revolutionalised the life insurance industry in India with its decision to offer only ULIPs. The rest of the life insurers followed, including the public sector Life Insurance Corporation (LIC). The key stock market indices are touching newer peaks and it is the time to take a look at how ULIPs are performing. The returns from growth funds of leading private sector players like, Birla Sun Life, HDFC Standard Life, ICICI Prudential Life and Bajaj Allianz, are performing very good. 
 
See Also: Know About ULIP Charges
 
The returns on ULIPs are normally higher than the mutual funds. ULIPs do not face redemption pressures as the insurance money is for longer term and hence offers room for fund managers to design better, disciplined investment strategies.

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