Market Linked Products vs Guaranteed Return Products : What should you choose?

On March 27, 2020, RBI reduced the repo rate by 75 bps to provide a stimulus to the economy during the Corona Virus Pandemic. But this has had a huge impact on all the small savings schemes. Shortly after the rate cut, all the rates for small savings schemes were also reduced.

The revised rates are :

With this drop in rates and their higher lock-in period, these products have now become less attractive.

The idea behind any investment is to get a return which will at least beat inflation over the long term. This will ensure that the real return is positive for you.

But, if you only invest in guaranteed or Fixed return products, will you beat inflation? Will you be able to create enough corpus to fulfill all your goals with such products? If the rate of return is lesser, then your investment amount needs to be higher. Can you make a higher investment, so that you can continue to invest in Fixed return products?

Let’s understand these questions in detail:

Market Linked Products vs Guaranteed Return Products: Which one can beat Inflation

Usually, while referring to inflation, we look at the CPI numbers released every month. Major expenses in our life are Healthcare, Education, Food and beverages, Clothing and footwear and fuel. These expenses are part of the CPI inflation number.

In February 2020, the retail inflation was at 6.58%. And all the major aspects of our expenses were growing as follows:

With such inflation trends and falling interest rates of fixed return products, it is difficult to beat inflation.

Hence ideally, you should have higher exposure to market-linked products as compared to fixed return products. Over longer horizons, equity-linked products beat inflation and give superior returns compared to zero risk investment options.

Is it possible to fulfill all the financial goals with only fixed return products?

Well, the goals can be fulfilled with the fixed return products but the investment amount would be extremely high in such cases.

Let’s take a case where an Investor has a goal of retirement which is 20 years away. Now, he can either invest in a product that will give a fixed return of 7%  pa. or a market-linked product with a return of 12% pa.

If the retirement corpus required is 3 Crores. Then the monthly investment needed for guaranteed return products is approx 57,000. However, if he invests in a market-linked product which gives the return of 12%, then the monthly investment required would be approx. 30,000.

In such cases, investment of about 60,000 per month for just one goal can be a stretch considering that there will be other goals to invest as well.

Does this mean you should not invest in Fixed – Return Products

No. This only means that an entire portfolio with just such products is not a good idea. The better strategy here would be to create a portfolio mix with a fixed return product and market-linked product.  The advantage of this would be that the downside of the portfolio would be substantially limited as during market volatility when the market-linked products undergo under-performance, the fixed return product will continue to give the return.

One thing to keep in mind is as the economy develops, the returns of products offered by government will continue to drop. And with their longer lock in periods, they offer no liquidity over short term. Hence, complete dependency on these products will only limit the growth of the portfolio.

A right mix of both can help you achieve the goals with good risk-adjusted returns.

So, what is your right mix? Get in touch with our team to know how Investica will help you with this decision making.