Even as mutual funds are becoming popular investment tools, bank fixed deposits remain one of the preferred routes of investment for many, especially those seeking safety for their principal and assurance of returns at a fixed interest rate. And that includes not just senior citizens but also investors who are saving for short-term goals.
ICICI Bank has announced a new type of FD—FD Xtra—which claims to go beyond regular deposits by providing extra features such as term insurance and market investing options. It comes in three variants. One variant provides a term insurance cover free of cost along with the FD, the second promises to allow investments in mutual funds using the money earned from the FD in interest, and the third gives regular payouts.
Financial planners suggest against bundling instruments. If you need to invest in mutual funds for your equity basket or other needs, you can always choose a fund that suits you. Similarly, life insurance needs should be assessed separately.
Here are the details of the first two FD variants.
In this variant, you get a free term life insurance cover for a year. So if you are an investor between 18 and 50 years, and you want to open an FD with at least ₹3 lakh for a tenure of at least two years, you will get a term life insurance cover of ₹3 lakh for one year free of cost. It is essentially a cover against your deposit. “If we look at the financial savings of households, a huge amount of money goes into fixed deposits. But very few people think of having a protection on their income. So we thought if we can have an element of protection in-built in a product like FD that has a pull of itself," said Pranav Mishra, head, retail liabilities group, ICICI Bank.
However, this will be free only for a year, and you will have to renew it by paying ₹250 from the second year. Moreover, Mishra said, this will be a group life insurance policy from ICICI Prudential Life Insurance Co. Ltd. This means that you can avail this policy as long as you remain invested in the fixed deposit. As soon as you cease to be a part of the group of these customers, you will not be covered.
Under this variant, the interest rate that you earn on your deposit can get channelised to a mutual fund through systematic investment plans (SIPs). This is available for investors taking a fixed deposit for at least ₹2 lakh for a tenure of at least a year. The tenure of the FD and the SIP can go up to 10 years. The investor can choose to invest in any regular mutual fund plan from ICICI Prudential Asset Management Co. The minimum SIP amount needs to be ₹1,000 per month.
The SIPs will start from the second month after the FD is started. For instance, if you take FD Invest for ₹2 lakh at a rate of interest of 7.5%, it would mean an annual interest payment of ₹15,000. So, ₹1,250 ( ₹15,000/12) will be credited each month to your savings bank account and it will be then debited towards an SIP.
An important factor to keep in mind is that bundled products are from group companies of the bank itself. That may not necessarily be a bad thing but it restricts your choice, especially when you are paying the price in the form of insurance premium or an asset management fee and distributor commission in a regular scheme.
“None of these features will make any meaningful impact for the investor. Such products force the consumer to be associated with the product in the long term if they want to get the benefits of the term insurance," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.
An individual should decide on adequate cover based on the expense replacement method and purchase an online term plan to reduce the cost, he said. For investments, Joseph said, you should go for a combination of debt and equity for the principal amount right from the beginning as the amount that will be generated as interest on the fixed deposit will not be enough. The interest amount even if invested in equity will be very low and will not give meaningful returns for your long-term goals. “The amount needed within five years can be invested in FDs or debt funds, based on the tax slab of the individual. For the rest, that would be required for later financial goals, I suggest should be parked in a debt fund and then moved to an equity fund using a systematic transfer plan over a few months," said Joseph.
Accordingly, if you are a risk-averse investor looking for an FD, it is a good idea to stick to simple deposits, and not combine it with insurance or mutual funds.