Guaranteed return products such as fixed deposit (FD), public provident fund (PPF) and government bonds are a popular choice among Indian investors. These schemes offer you a fixed lump sum amount, a mandatory commitment for a predetermined period, and an assured fixed rate of interest. Investors enjoy the security of a guaranteed rate of return, with certain options offering additional tax benefits.

While guaranteed return products play a crucial role in balancing a high-risk portfolio, relying solely on these investments may lead to suboptimal wealth creation. The returns generated from such products tend to be modest, and in some cases, they may not be the most tax-efficient.

Investors often grapple with the decision of whether to pursue guaranteed returns or opt for riskier, potentially higher-yielding investments. Let us find out whether investing in guaranteed return products is a good or bad financial decision.

Stable Returns

Investing in financial instruments that promise guaranteed returns can be appealing for several reasons. Stability and predictability are paramount in a market characterised by volatility. For conservative investors, the assurance of receiving a predefined return on investment provides peace of mind. Guaranteed returns can be particularly enticing during economic uncertainties or when market conditions are unpredictable. This conservative approach aligns with the principle of capital preservation, which is essential for those looking to safeguard their investments.

Also Read: Tax-Smart Retirement Planning: Tips for a Secure Financial Future

The Downsides

While guaranteed returns ensure safety, there are inherent downsides that investors must consider. One of the most significant drawbacks is the potential for lower yields compared to riskier investments. When inflation rates fluctuate, investments with guaranteed returns may not always keep pace with the rising cost of living. Additionally, guaranteed returns may limit an investor’s ability to capitalise on market upswings. In a dynamic financial environment, where opportunities for higher returns exist, adhering strictly to guaranteed instruments may hinder wealth accumulation over the long term.

Tax Liability

Tax implications are another aspect that investors need to take into account. The taxation of guaranteed return instruments can impact the overall returns. Understanding the tax implications is crucial for making informed investment decisions that align with an individual’s financial goals.

The Right Strategy

The key investment strategy lies in finding the right balance between risk and security. While guaranteed returns provide stability, a diversified portfolio that includes a mix of assets can offer the potential for higher returns over time. Diversification helps mitigate risks associated with market fluctuations and inflation, allowing investors to harness the benefits of different investment avenues.

Financial experts often recommend a portion where the allocation towards guaranteed return instruments is kept providing a safety net, while the remaining is invested in equities, mutual funds, or other higher-risk assets to capture growth opportunities. The decision to invest for guaranteed returns or pursue riskier options is not a one-size-fits-all proposition. It hinges on individual financial goals, risk tolerance, and the investment horizon. While guaranteed returns offer a sense of security, the potential for higher yields in riskier investments cannot be ignored.

Adhil Shetty, CEO, Bankbazaar.com, says, “Guaranteed return products offer stability and consistent income, catering especially to risk-averse individuals, such as senior citizens or those with a lower risk appetite. However, to maximize returns, one should capitalize on market upswings, necessitating a willingness to undertake slightly higher risks than those associated with guaranteed return products. Diversification through mutual funds and investments across various asset classes is crucial for maintaining a well-balanced portfolio. It is often said that you must not put all your eggs in one basket aptly applies to investment strategies, emphasising the importance of spreading investments across multiple avenues to mitigate risks and optimise potential returns.”

A well-thought-out investment strategy must focus on a diversified approach, having the benefits of both guaranteed and riskier assets. It makes sure that you do not lose out on returns when the market moves upside.