Any typical investor wants his or her investments to get high returns as quickly as possible, all without the risk of losing out on the principal amount. This is the reason many always look for the top options that can grow their return on investments in a few months with little or no risk. The truth is however, that no investment product gets us that ideal combination of high return and low risk. In reality, risk and returns go hand in hand. 

For the general masses who have the real-life aspects to worry about (including their marriage, child’s education, own retirement etc.), investing high with high risks is not an option. It is best to have clarity on the amount of return you can expect after a fixed span of time. In this blog therefore, I would like to share with you the various Guaranteed Investment Products (GIPs), and their importance throughout your life.

What are Guaranteed Investment Products

Like change, market volatilities are a constant in our lives. It can be tricky to predict when the market can go through ups and downs. It is therefore important for investors to understand and evaluate their options before making the leap, and include the ones in their portfolio that generate guaranteed returns. Such a category is the Guaranteed Investment Products that promise returns irrespective of the changes in market conditions and interest rates. A guaranteed investment product not only gives you better returns on a tax-adjusted basis, they also give you tax benefits, fixed and tax-free returns, depending on the type of GIP you choose. Before we dive into the different types of GIPs, it is important to understand why GIPs must be included in your investment portfolio.

The importance of GIPs for investors

It is worth noting that not all investments should focus only on returns, while they do matter. Even if the aim to invest in equities should focus on growth and higher returns, while choosing GIPs you must also focus on stability, safety, liquidity, and downside protection measures. Guaranteed Investment Products in this case, tend to come with several benefits including a guaranteed alternate source of income, family security, tax benefits, the ability to forecast future income, help with your retirement goals, and more. Let us explore such benefits in more detail:

Secure financial future: 

Over the past year of the pandemic for instance, the economic slowdown caused as a result has concerned a majority of Indian population, forcing them to invest in medical and life insurance. This is a good step as it helps secure the financial future of a family. It also ensures that you have a long-term return plan in your financial portfolio. This is because when market linked products underperform due to volatility, fixed or guaranteed return products continue to give you the same return, and you can also lock in the rate of interest offered for a long time. 

Ability to minimize liquidity risks:

GIPs offer better liquidation terms without the loss of money. People also invest in GIPs as a savings protection plan with an objective to avail wealth building tools for the future. That said, often investors have to liquidate the investments made for the long term due to unforeseen exigencies like health emergencies. Such a process of terminating your insurance-plus-savings plan before maturity is referred to as surrendering. Most investment instruments in the market for example, do not allow you to liquidate savings within the lock-in period, given that surrendering your policy also comes with a hefty surrender charge. 

Greater savings with tax benefits:

GIPs also come with taxation benefits. You do not have to pay taxes on amounts invested, neither on the accruals, as well as the maturity amount. For instance, products with life or health insurance benefits not only allows you to get significant tax savings under Section 80D, but also allows you to grow your principal sum assured over the years, accruing greater savings over the long run (in addition to the benefits that come with a health or life insurance policy).

Instruments available under Guaranteed Investment Products  

If you may have surmised from above, saving money is more than stacking away cash and letting its growth stagnate. You must let your money make more money by investing in products that ensure returns in some way or the other. With that in mind, let us go over the various GIPs available to us.

• Fixed deposits: Recommended for any age group, a term or fixed deposit is an investment that includes a principal amount being deposited into the bank, usually carrying a short-term maturity ranging from a month to a few years. Bank FDs in fact, are one of the most popular investment instruments in India, given it is risk averse. In case the bank fails, bank deposits up to INR 5 lakhs are insured by the government. The deposit insurance scheme also covers all the institutional banks operating in India, including co-operatives, private sector and even branches of foreign banks in India.

• Guaranteed Life Insurance: Recommended for age groups from 25 to 55, Guaranteed Life Insurance products are a variant of Life Insurance plans that offer regular income for a specified term, varying between 10 to 30 years. Not only does it come with a reversionary bonus at the time of maturity, it also provides death benefits for dependents, is exempted from income tax, and also comes with additional riders like the Accidental Death Rider benefit. It is to be noted that one needs to opt for guaranteed pans if fixed and assured returns are preferable over low (albeit guaranteed) returns. 

• Guaranteed Annuity products: Recommended for people over the age of 50, Guaranteed Annuity plans ensure regular and guaranteed income for your sunset years. In such plans, you either pay a lump sum amount or regular instalments within a given period to get back regular pay-outs as long as you live or within a pre-specified period. The insurance company typically invests your money and pays back the income as payments for your retirement. To compare this to a life insurance product, while an annuity plan covers the financial risk of living through your elder age without the lack of comfortable living, a life insurance policy covers the risk of sudden death.

• Non-convertible Debentures: Suggested for any age group, Non-Convertible Debentures or NCDs are another fixed income instrument, typically issued by high-rated companies in the form of a public issue to accumulate long term capital growth. NCDs generally fall under the debt category. They have a fixed maturity date, with the interest payable along with the principal amount on a monthly, quarterly, or annual basis, depending on the specified fixed tenure. This benefits investors with high returns, low risks, liquidity, and tax benefits within the short term, and are even transferable.  

• Public Provident Fund: Introduced by the government in 1968, PPFs come with the objective to mobilize small savings in the form of investments, typically suggested for age groups above 30. It can also be referred to as a savings-plus-tax saving instrument, as it enables you to build a retirement corpus, all while saving on annual taxes. Investors can use PPFs to diversify their financial and investment portfolio as a safe investment, as at even downswings of a business cycle, PPF accounts can help preserve your capital for the fixed lock-in period. Also, while the interest rate keeps changing, it still remains stable till the next change in the market takes place. Thus, you are guaranteed partial returns due to the change in interest rates, the benefits of compounding, and safety of being backed by the government, making PPFs to be a highly preferred investment option.    

• Corporate Fixed Deposits: Suggested for any age group, Corporate or Company Fixed deposits are held over a fixed period at fixed interest rates, and are offered by several financial (banks) and non-banking financial companies (NBFCs). Which means you can choose from multiple company fixed deposit options varying in tenures, institutions that suit your purpose and interest rates, to avail steady returns. This is the type of FD with private players that offer higher returns on investments. Note that it is a non-transferable option. Corporate FDs tend to be on the higher side of the risk, whereas bank FDs are insured. Compared to these, Non Convertible Debentures  (NCDs) are either secured or unsecured, depending on the principal amount, as well as the rate of interest issued by the company offering debentures.

Tracking and balancing your portfolio regularly

The year of the pandemic has been proof of why it is necessary to have a balanced portfolio. Instead of second-guessing market trends to create a portfolio, a balanced investment strategy is one that combines asset classes in a portfolio in a way that balances risks and returns, one that seeks a balance between capital preservation and growth. The strategy is to take advantage of a mix of aggressive growth instruments, guaranteed investments as well as life and medical insurance elements to ensure a healthy financial planning. 

Conclusion

In order to prevent unexpected impact on your portfolio, it is important to track and review it regularly. You need to know at all times how your investments are performing, so that you can measure how much you have earned towards your financial goals. Your account statements for example, also lists out the several costs and fees associated with your investments. Any fees you pay ends up lowering the return you get on your investments. If you see you are paying too much in fees, it is best to seek out other cost-saving alternatives appropriate for your portfolio. Furthermore, monitoring your investments also helps you pivot or change strategies before or at the nick of time, all better than making any changes before it is too late. You may even seek the help of a financial advisor, whose expertise you can use from time to time to ensure your financial journey is on the right track. At the end of the day, you need to create a healthy portfolio mix that not only secures your future, but also ensures that your financial goals are met.