Best Short Term Investments Options || Debt Fund or Insurance Plan || Insurance vs Mutual Funds
Debt Funds or Insurance Plan, Which Are Best Short Term Investments Options??
Many wealth managers are asking their clients, especially those with deep pockets, to consider “investing’ in insurance plans that offer guaranteed returns in the wake of the ongoing crisis of confidence faced by the debt mutual funds. They claim these “non-participating’ insurance plans offer guaranteed better post-tax returns than `risky, high-yielding’ debt mutual funds.
Debt mutual funds are facing a severe crisis after Franklin Templeton Mutual Fund, one of the prominent players in the debt space, suddenly shut six of its debt schemes. On March 23, Franklin Templeton Mutual Fund said it is winding up six of its schemes –Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund, to severe liquidity.
The fund house said it is forced to take the step to protect the wealth of investors. The fund house had invested in lower-rated papers and it would have been forced to sell these investments at a steep discount if it was forced to sell – that is, if it succeeded in finding buyers – them to meet the redemption pressure.
Credit Risk Funds-Please come out and can chose for Gilt Funds
Wealth manager Opinion:
Wealth managers may be filling the gap with insurance plans that have a tax advantage over debt mutual funds. Proceeds from insurance plans are tax-free while debt mutual funds attract short-term (as per income tax slab) and long-term capital gains tax (20% with indexation benefit) based on the holding period of investments. Debt mutual funds held over three years qualify for long-term capital gains tax.
Insurance plans, including non-participating plans, are meant for guaranteed safety and long term. If you have 5-10 years and you are okay with no liquidity in this period, you could look at this option. However, when we say guaranteed returns, we have to look at who is giving that guarantee.
Different terminologies in guaranteed plans:
The only thing which we need to look at the time of buying the insurance guaranteed plan is the Guranteed bonus part and the vested bonus.
Both are different things but at the time of selling but are clubbed together and then sold. Which is not right.
While on the one hand guaranteed return is confirmed but vested bonus is totally dependent on the company performance and basis which it is declared and added to your pay-out amount.
These non-participating insurance plans can offer post tax returns of around 5.5-6.5%, depending on their tenure.
For your investment, three things are very important: safety, liquidity and return. You should opt for an option that has at least two covered. I would say RBI and tax-free bonds are better if you want to stay away from debt funds.