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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.

A good investment strategy requires choosing the right mix of safe and risky investments.
Among safe investments, fixed deposits (FD) 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.

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
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Return on ULIP

Company Fund Last 1 year Last 3 years Last 5 years

Birla Sun Life Creator 25.46% 66.35% 136.97%

Birla Sun Life Builder 20.60% 42.10% 69.14%

ICICI Balancer II 11.86% 43.69% 90.17%

Prudential

HDFC Life Time Flexi Growth 6.50% 8.50% 12.90%

TATA INVEST ASSURE -7.28% 37.06% 165.13%

PLUS

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 from Fixed Deposit (FD)

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Below given table will provide you details about the performance of Fixed Deposit return over
a period of 10 years.

Money Deposited every year = Last year’s FV + 1,00,000

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).

Returns from ULIPs

Below given table will provide you details about the performance of Fixed Deposit return over
a period of 10 years.
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Above mentioned table shows that the investment of Rahul has gone up to Rs. 6,88,851.14
in a period of 5 years. During a period of 10 years this will grow upto Rs. 19,32,922.87.

Analysis of Returns

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)

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)
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Difference in 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

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.

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

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.
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Graphical Representation
From the below given table you can understand the difference in return from ULIP and 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.

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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Regards,

Kirang Gandhi

Corporate Financial Planner

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