Investment Battle: Debt Funds Vs FD Vs Guaranteed Returns Insurance Products

Carefully planned investments are the key to financial freedom and wealth creation. It provides a strong financial footing thereby covering the financial requirements. Based on the investment horizon and risk appetite and respective financial requirements, there are multiple types of investment options available in the market. Some of the most popular investment options include debt funds, fixed deposits, and guaranteed return insurance products. In this essay, there will be a comparative study of these three investment instruments.

• Debt Funds

Debt funds are the types of mutual funds which invest in any of the fixed income or debt securities like bonds and T-Bills. Some of the popular options of debt funds include:

• Gilt fund
• Short term debt plans
• MIPs or Monthly Income Plans
• Liquid mutual funds
• FMPs or Fixed Maturity Plans

Apart from these, debt funds also include several types of investments in short-term, mid-term and long-term bonds. 

Debt funds are suitable for those individuals with comparatively less risk appetite who are not willing to invest in the extremely volatile equity market. A debt fund investment ensures a low yet steady income relative to the equity investment returns. Debt funds are comparatively less volatile.

1. Beginner’s Guide to Debt Fund Categories
   1. Income funds
   2. Credit opportunities
   3. Medium and long term gilt
   4. Short-term gilt
   5. Dynamic bond
   6. Short-term
   7. Liquid
   8. Ultra short term
2. Tenure Based Debt Categorisation:
   1. Ultra Short Term:  This is used for parking the surplus funds for the time being which is the nearest alternative to parking fund in a savings account. The tenure of such funds is – 0-3 months.
   2. Short-term: These are suitable for fulfilling financial goals shortly. The tenure ranges from 3-12 months.
   3. Mid-term: These are ideal for investments made to achieve financial goals in the near future. The tenure ranges from 1-3 years.
   4. Mid-term to Long-term Goals: The tenure ranges from 3-4 years or beyond. Depending on the investment horizon, it can be chosen
3. Types of Risks in Debt Funds:
   The debt funds chiefly carry three types of risks:
   1. Credit Risk: This is the default risk of the issuer who does not repay the principal and the interest.
   2. Interest Rate Risk: this is the effect of the changing interest rates on the value of the securities of the schemes.
   3. Liquidity Risk: This is the type of risk carried by the fund houses of not being able to meet the redemption requests due to the lack of enough funds for liquidity
4. Debt Fund Returns
   The returns offered by the debt funds are comparatively lower than the equity funds. Moreover, there is no guarantee of the returns. The NAV of the debt funds changes with the change of the interest rates in the market. The NAV is indirectly proportional to the interest rates.
5. Debt Fund Expense Ratio
   This is one of the most important factors to consider before investing in debt funds. The expense ratio is determined by the percentage of the total asset of the funds. This is a fee for the fund management processes. As the returns from the debt funds are not significantly high, too much of the expense ratio might hamper the investment earnings. It is best to choose schemes with lower expense ratio which becomes quite suitable in the long run.
6. Tax Implications on the Debt Fund Investments
   The tax implications on debt fund investments are applicable in the following way:
   1. Short Term Capital Gains Tax
      If the investor can hold the units of the scheme for at least three consecutive years, then the capital gains earned through that is termed as short-term capital gains, in short STCG. STCG is then added to the taxable income of the investor as is then taxed as per the applicable tax slab.
   2. Long Term Capital Gains Tax
      If the investor can hold the units for over three years then the capital gains earned through them is termed as the long-term capital gains, in short LTCG. LTCG taxation stands at 20% with indexation benefits.

Debt Funds at a Glance

• Fixed Deposits
  Fixed deposits are a type of term deposit accounts which earns interest to the investors for deposited lump sum amount for a pre-fixed tenure. There are varieties of fixed deposits available in almost all the major banks of the country with a tenure range from 7 days to 20 years. A fixed deposit investment is considered to be one of the safest investment options and ideal for risk-aversive investors. They can earn interest on the invested amount for a considerable period. On maturity, the investor will receive the principal along with the interest.

1. Types of FDs
   There are multiple types of FDs designed to meet the variable needs of the investors. Some of them are as follows:
   1. Standard
   2. Tax-savings
   3. Special
   4. Corporate
   5. Regular
   6. Senior citizen
   7. Flexi
2. Features of Fixed Deposit
   1. Standard FD 
      1. Investment is for a pre-fixed tenure
      2. Interest rate is pre-determined by the bank
      3. Tenure ranges from 7 days to 10 days
      4. The rate of interest rate remains higher than the savings account
   2. Tax-saving FD
      1. The maximum tax benefit is limited up to INR 1.5 lakh in one financial year under section 80C of the Income Tax Act 1961
      2. Comes with a lock-in period of 5 years
      3. Single-time lump sum deposits
   3. Special FD
      1. Invested for a fixed tenure
      2. If the fund is not withdrawn for the specified period, it will gain higher interest than standard FDs
   4. Regular Income FD
      1. Provides regular interest
      2. The interest payout can be monthly or quarterly
   5. Senior Citizen FD
      1. Can be enjoyed exclusively by the individuals above 60 years of age
      2. Usually provides a higher rate of interest than all the other FD schemes
   6. Flexi FD
      1. The initial deposit can be based on the choice of the investor and linked to the respective savings account
      2. The savings account deposit can also be limited while the rest of the investment earning will get automatically transferred to the FD
   7. Corporate Deposits
   8. Usually offers a higher rate of interest than banks
   9. Offered by NBFCs
3. Benefits of FD
   1. Guaranteed returns
   2. Comparatively higher interest rates than RDs and savings
   3. Offers tax benefit under Section 80C up to INR 1.5 lakh in a single financial year
   4. No limit to the investment amount
   5. The savings account can be linked with the FD account
4. Taxation of FD
   There is no tax benefit for FDs other than 5-year tax saving FD. The interest is always taxable in the hands of the investor and is taxed as per slab.

FD at a Glance

• Guaranteed Return Insurance Products
  This is a notable option for providing both the insurance as well as an investment option. The insurance cover seems to be negligible in the long run but the guaranteed return options are quite attractive especially for the 10-11 year premium terms. 
  
  Under the current context, the guaranteed cash flows at 5.4-5.7% p.a. tax-free seem to be quite attractive. There are very few guaranteed return insurance products available in the market. Therefore, the choice of products in this genre becomes limited.
  
  Guaranteed Return Insurance Plans are also known as Endowment Insurance Plans. These types of plans also offer a tax benefit of the maturity amount if the sum assured is minimum 10 times the premium. The maturity benefit is thus tax-free under section 10(10)D of the Income Tax Act.

1. Basic Features of Guaranteed Return Insurance Products
   1. Any individual between 18-60 years of age are eligible for choosing this financial instrument
   2. If the insurance holder passes away during the policy term, the death benefit is received by the nominee
   3. The tenure may vary from 10-30 years
   4. The payout frequency is chosen by the policyholder
2. Important Factors to Consider While Buying Guaranteed Return Insurance Products or Endowment Plans
   1. What are the returns that are required by the investor?
   2. The payout frequency
   3. The type of income generation that is required
3. Benefits of Buying Guaranteed Return Insurance Products or Endowment Plans
   1. Maturity benefits: If the life assured survives the entire term, he/she will receive the maturity benefits at the end of the term
   2. Death benefit: In case of the untimely death of the life assured happens during the policy term, then the death benefit is provided to the nominee(s)
   3. Tax benefit: The relevant tax benefits are applicable as per Section 80C and Section 10(10D) of the ITA
   4. Modes of premium payment: It is variable and can be chosen as per convenience—monthly, quarterly, half-yearly, annually via cash, cheque, credit card, debit card, ECS, online payment.
   5. Guaranteed benefit: The benefits supposed to be received by the investor under the scheme are guaranteed
   6. Premium paying term: The investor is eligible to select the premium paying term from 5 to 15 years as per the plan.

Comparative Study Between Debt Funds Vs FD Vs Guaranteed Return Insurance Products

Although it is not a fair comparison as insurance cannot be compared to investment. This is because the charges for an insurance policy would always be more because of the mortality coverage deducted for the life coverage that is provided. However, endowment plans play a very important role in the financial planning of an individual for the debt portfolio. However, you need to choose the plan based on your risk appetite, financial goals, and tax planning.