A savings plan is a life insurance investment plan that offers various prospects and is not limited to just saving money. It also helps in investing and multiplying your money efficiently and systematically. The investment will empower an individual to meet the financial needs of his/her family and fulfill his/her financial goals. According to a survey in 2018, in India, as much as 83% of people have planned their retirement by investing in a savings plan. Indians have maintained a high net savings rate, which is about 19.7% of GDP. This is because the savings-investment plan comes with numerous features to help individuals fulfill their financial goals. Let's explore these features:
Entry Age and Tenure:
With savings plans, people usually get a broader entry age with versatile investment tenure. The determination of the risk appetite of the policyholder is done by the entry age. Thus, a saving plan is planned out based on the risk profile of the policyholder. Since people in their 20s and 30s take higher risks to receive profitable returns, unit-linked insurance plans (ULIPs) will be suitable. Contrarily, the people who are reluctant to take risks are more suited for money back plans, thus keeping their money safe despite low returns. Additionally, the mid-to-long term investment tenure allows depositing a significant corpus during the period.
Life Cover and Riders:
There are particularly some saving plans that are preferred over others. For example, ULIPs are preferred due to the dual benefit of a life insurance cover and market-linked savings returns they offer. Also, LIP savings plans have an option of adding specific riders. These riders benefit from enhancing the financial protection of the policyholder and his family in case of any disability, illness, or accidental death.
Savings plans offer a variety of options when it comes to investing in financial instruments. It ranges from equities involving reasonably high risk to traditional and safer instruments such as fixed interest securities. It can be any corporate bonds, government securities, and money market instruments.
While selecting a savings plan, it is essential to know about the extra costs and charges associated with certain actions. The other extra expenses can be in the form of fund management charges, discontinuance charges, fund management charges, premium allocation charges, switching charges, mortality charges, partial withdrawal charges, and other miscellaneous charges. These attached charges cannot be avoided, but the best plan will have minimum charges and offer versatility regarding cash withdrawal, receipt of the policy term, and bonus.
A good savings plan should also be instrumental in saving tax. According to the 80c of the Indian Income Tax Act, 1961, the premiums of most life insurance savings plans can be deducted from taxable income up to Rs. 1 Lakh. Besides, under section 10D of the Indian Income Tax Act, 1961, the benefits of maturity and death are also subject to tax exemption. Thus, the savings plan is the most preferred tax saving instrument.
With so many options, it can be quite a task to choose the right savings plan. Let us see how to go about choosing the right one.
How to choose the right guaranteed savings plan?
The market is full of several saving investment plans, and every plan has its circumstances corresponding to it. It is essential not to invest in a wrong savings plan without thoroughly researching the fund and plan's assets allocation. One way of collecting information is by doing a proper background check about a suitable savings plan's features. Many people decide to buy a savings plan online as it is a better way to avoid any brokerage or excessive and arbitrary charges. However, it is paramount to indulge in some self-study on the savings plan best suited for you.
To meet any unforeseen financial commitments, people save ample money and build a vast corpus. However, you need a certain plan to think smartly and always look ahead at the big picture. Let us explain what things should be kept in mind while doing so are.
- Clarity of goals
Primarily, you have to make a checklist of the financial goals which you wish to achieve in life. It should be a structured goal for every step of your life, such as house buying, marriage expenses, child care, and early retirement. With this checklist, you will have a brief idea of how much money to set aside every month. If you are planning to invest in savings, preparing a checklist is crucial once you start earning.
- Choice of investment
Since you have many profitable options to save your money, you can benefit from it. Presently, ULIP is the best saving plan as it offers dual benefits of insurance and investment. Based on your risk profile, the premium amount is invested in equity, debt, or a combination of both of them based on your risk profile. It will thus give you a good return and secure your family financially during an unforeseen event.
- Automatic transfers
You have to set your salary account so that the money is automatically transferred to the investment account. Thus, a direct debit will not tempt you to hold back the money, since the transfers are done automatically on a specific date. However, if you have opted for manual transfers, you might skip saving for a few months.
- Contingency fund
Life is unpredictable, and thus you should always plan for contingencies or emergencies you might come across when you expect it the least. It is always better to set aside at least some percentage of your monthly salary for a contingency fund. Thus it will help you meet the unfortunate expenses with confidence. For this, you must choose highly liquid investment choices such as bank deposits because there might be a requirement for quick cash.
- Wise and Planned Expenditure
To start saving regularly, you should cut down all of your unnecessary expenses. Always try avoiding the usage of credit cards as the interest rates on them are relatively high. It is advisable to use cash or your debit card while shopping. This helps you keep track of how much money you're spending, thus instilling a sense of financial discipline.
Now that you have a brief idea about how to go about choosing the right plan let us see what the status of saving plans in India is.
Status of Saving Plans In India
India maintains a reasonably high net savings rate. The national saving rate is almost 19.68 per cent of the entire GDP. However, in 2019, the gross savings rate and net savings rate declined by around 7% and 12%. Moreover, net savings rate growth as a % of GDP has been regularly falling since 2011-12. Besides, a considerable percentage of income is still in the cash or currency form. People invest them in low-yielding bank deposits and unproductive assets like Gold. This whole scenario needs to change.
To determine the best saving plan, you need to finalize an investment horizon and narrow down your risk appetite. Also, you must be careful about the specifics of the saving plan you are opting for. Consider all the vital factors such as the features of the saving plan offers, how flexible it is, and other additional benefits such as add-on riders.
Below is a table of interest charts of various saving plans in India.
|Savings Plan||Rate of Interest||Guaranteed Income|
|Public Provident Fund||7.10%||Yes|
|Liquid Mutual Funds||6.5-7.5%||Low-risk Market Linked Returns|
|Equity Linked Savings Scheme||12-15%||Market Linked Returns|
|Equity Mutual Funds||12-15%||Market Linked Returns|
Now, let us talk about the above plans in brief.
- Fixed Deposit- FDs are low-risk investments. Investors can invest a particular sum of money for a specified period and earn a fixed interest rate. Upon maturity, the investor can redeem the money along with interest. FDs come with a five year lock period.
- Public Provident Fund- PPF contributions are subject to a tax deduction. Investors can claim up to INR 1,50,000 for a tax deduction. Also, the returns are free from tax. The minimum investment is ₹ 500, and the maximum is ₹ 1,50,000. The rate of interest is compounded annually, and an investor cannot open multiple accounts. It comes with a 15 years lock period.
- Recurring Deposit- You can invest a minimum amount of ₹ 500 for a bank RD, and ₹10 for a post office RD. The interest differs from bank to bank. Besides, the interest rates are subject to market fluctuations. The tenure of an RD savings plan varies between 7 days to 10 years.
- Liquid Mutual Funds- The minimum investment here is ₹ 500, and there is no upper limit. It does not have any restriction on entry or exit loads.
- Equity Linked Savings scheme- The minimum amount is ₹ 500 via SIP and no limitations on maximum investments. The lock period is e years, but you can continue to invest in this scheme. The investment up to ₹ 1.5 lakhs is tax exempted. However, the long term capital gains (LTCG) over INR 1 lakh is subjected to taxation.
- Equity Mutual Funds- The minimum lump amount for equity mutual funds is ₹500. The taxation is done based on the holding period.