Difference between assured and guaranteed return products
2 min read 01 Jul 2014, 06:56 PM ISTNever buy an assured return product from an unknown company
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The purpose of investing is to get a return. Your return depends on the type of asset or security you invest in. Some assets give market returns that are dynamic and others give fixed returns that may be assured or guaranteed.
Assured return
Assured returns mean that in all likelihood you will get the promised return. It could be in various forms, such as interest payout on a loan. The loan could be in the form of a bond or any other security. Let’s say you buy a non-convertible debenture of a private company, which is offering an interest coupon of 10% per annum. This is assured returns. It means that you may get this interest every year till the bond’s maturity. But this is not guaranteed, which means that if things go wrong for the company financially, you may not get the interest payout.
Insurance policies that double as investments also give assured returns. At the time of sale, the agent may show future returns in a specific expected range. These are also assured returns with no guarantee that the return can be achieved every year or even in one year.
Real estate schemes that offer a lease and rent-back option to buyers are also assured returns schemes. Say, a builder or developer has a recreational project such as a resort or hotel, and sells individual rooms to buyers. For the buyer, the deal includes an annual rent to be paid by the builder to the buyer for a fixed number of years. Once again, this is an assured return; if the developers is cash strapped, there is no way to know for certain whether the payment to the buyer will be made or not.
Corporate deposits and bank fixed deposits are also assured return products. However, in case of the latter, a value of up to 1 lakh is insured by Deposit Insurance and Credit Guarantee Corp.
Guaranteed Return
Products that go one step further and ensure that the promised return is paid out are in the guaranteed return space. But there are hardly any such products. Public Provident Fund, Employees’ Provident Fund and Post Office Monthly Income Scheme are some of them. Insurance policies based on traditional plans also offer some guaranteed returns.
Mint Money Take
Essentially, assured return products offer investors a fixed return but there is actually no certain way to say whether the payments will always be made on time or made at all. While investors feel that assured returns are safer than market-based returns, it’s not so always. For investing in a product with assured returns, you have to be mindful of the company issuing the product. The company must have a good reputation in repayment of financial obligations. Never buy an assured return product from an unknown company. Buy such products only where the underlying return is not dependent on the mark-to-market value.
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