Many people aspire to build money. However, the path to financial success necessitates a cautious strategy, one that prioritises stability and security alongside expansion. In this pursuit, fixed deposits (FDs) and unit-linked insurance plans (ULIPs) emerge as reliable partners, providing a mix of dependability and prospective rewards. Understanding their relevance and strategic use might pave the way to safely developing wealth in India’s ever-changing economy.
What is a fixed deposit? And what are ULIPs?
Fixed deposits are an important tool for conserving wealth. They represent a secure investment avenue offered by banks and financial institutions, wherein an investor deposits a sum for a predetermined period at a fixed interest rate. On the other hand, ULIPs integrate investment and insurance components, providing an opportunity for wealth creation along with risk coverage.
Strategic ways to utilise FDs and ULIPs for wealth building –
- Exigency fund
An exigency fund is essential to weather unanticipated financial worries such as healthcare issues, job loss or unanticipated expenditures. FDs act as an ideal instrument for forming an exigency fund owing to their stability and liquidity. With FDs, you can ensure instant fund access without risking the principal component, offering a financial safety net in the course of turbulent times.
- Diversification
Diversification is an essential approach for reducing risk in investing portfolios. Allocating a portion of your savings in ULIPs and FDs, permits you to diversify your risk throughout asset classes. FDs endow assured returns and stability, whilst ULIPs expose you to market associated returns. This balance contributes to consistent and steady return over time, even when one type of asset underperforms.
- Short-term goals
Short-term financial goals, such as purchasing a vehicle or paying for a trip, necessitate a safe and easily available investment alternative. Short-term fixed-rate deposits provide a solution by paying a predefined interest rate over a certain period of time, guaranteeing that your money is there when needed. This enables you to achieve your short-term goals without subjecting your money to market changes.
- Kids higher education
Investing in ULIPs with a long-term view can provide enough cash for your child’s education. By starting early and selecting a ULIP with a proper risk profile, you may leverage compounding to build a sizable corpus by the time your child reaches higher education age. This offers financial security and peace of mind, ensuring that your child’s educational goals are completely met.
- Wealth accumulation over the long term
Long-term FDs and ULIPs are effective wealth-creation strategies due to the compounding effect. Locking in your assets for an extended period allows you to profit from compounded returns, which calculate interest not only on the initial investment but also on the interest collected over time. This compounding impact may result in large wealth accumulation over time, making them perfect for purposes like retirement planning or leaving a legacy.
- Planning for retirement
Building a retirement fund is critical to ensuring financial independence in your senior years. By investing a part of your assets in FDs and ULIP plans, you may build a diversified retirement portfolio that combines stability and growth. FDs give guaranteed returns, whilst ULIPs expose investors to stock markets, allowing for more long-term growth potential. This combination provides a solid retirement income stream while also protecting money for future generations.
- Opting for systematic investment route
Systematic investment plans (SIPs) in ULIPs promote disciplined investing by allowing you to invest a set amount at regular intervals. This method aims to average out the cost of investment over time, reducing the impact of market volatility. Staying invested through ups and downs allows you to reap the benefits of compounding and generating money over time.
- Tax planning
Tax-saving FDs and ULIPs offer dual benefits of wealth accumulation and tax optimisation. Investments in tax-saving FDs qualify for deductions under Section 80C of the Income Tax Act, reducing your taxable income and lowering your tax liability. Similarly, premiums paid towards ULIPs are eligible for tax deductions, making them an efficient tool for long-term tax planning while building wealth simultaneously.
- Considering asset allocation strategy
ULIPs allow you to diversify your assets across asset classes such as stocks, debt, and balanced funds, based on your risk tolerance and financial objectives. This asset allocation approach diversifies risk and maximises returns by capitalising on the variable performance of different asset types. Adjusting your allocation over time allows you to respond to changing market circumstances and achieve your wealth-building goals more efficiently.
- Medical expenditure
Investing in ULIPs with health coverage riders provides full financial protection from escalating medical expenditures. These riders cover hospitalisation costs, operations, and severe diseases, ensuring that your funds are not drained in the event of an unforeseen healthcare emergency. Combining investing with insurance protects your financial well-being while planning for medical emergencies.
- Transfer of wealth
FDs and ULIPs can be valuable components of your estate planning strategy, allowing for easy wealth transfer to future generations. Designating nominees and beneficiaries ensures that your assets are dispersed according to your desires in the case of your death. Furthermore, ULIPs include built-in riders like as accidental death benefits or premium waivers, which provide further financial security to your loved ones.
- Hedge against inflation
Long-term ULIPs offer an effective hedge against inflation by providing returns that outpace the rising cost of living. With exposure to equity markets and the potential for higher returns, ULIPs help preserve the purchasing power of your wealth over time. By staying invested for the long term, you not only beat inflation but also accumulate wealth that keeps pace with the evolving economic vertical.
- Upgrades in reference to lifestyle
Planning for significant life events such as purchasing a home or starting a business requires careful financial preparation. By intelligently investing in FDs and ULIPs, you may lay a solid financial foundation for these goals. Whether it’s saving for a down payment on a home with short-term FDs or backing entrepreneurial initiatives with long-term ULIPs, these investment options allow you to pursue your ambitions while maintaining financial stability.
Ending note
The importance of accumulating wealth securely cannot be avoided. FDs and ULIPs emerge as strong products that provide a mix of security and development potential, meeting the different demands of investors. By adding these products to your investing plan, you not only promote financial stability but also build the framework for long-term wealth growth. As you begin your wealth-building journey, consider how FDs and ULIPs may help you achieve your financial goals and provide a bright and secure future for you and your loved ones.
