Ramesh is a risk averse investor. Over the last many years he has been investing in traditional investment products like Bank Fixed Deposits and Government sponsored schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) and various Postal Office Schemes etc. He was happy with the returns on fixed income securities. So he never gave a serious thought on investing in equity markets. Previously investments in fixed income securities like PPF and NSC used to earn him a return of 12%. But over the last few years the Government has brought down the interest rates on these products from 12% to 8%. Ramesh is not happy with the interest rates coming down from 12% to 8%. But at the same time in the lure to earn high returns Ramesh is sceptical about investing in equity markets as he is not willing to take risk as he has seen some of his friends lose even a portion of their capital because of investments in stock markets. So what is the solution for people like Ramesh who don’t want to risk their capital and at the same time have some exposure to capital markets so that they can earn superior returns as compared to returns given by fixed income securities.

Advantage ICICI

Keeping in mind the requirements of people like Ramesh, ICICI Bank has come out with a product called ICICI Advantage Deposit. This product is a combination of fixed deposit and mutual fund investment. This product offers the safety of a fixed deposit (capital protection) and high returns of an equity fund. This is a monthly interest paying fixed deposit. The interest paid every month is invested in the capital market through a mutual fund. The monthly fixed interest amount acts like a Systematic Investment Plan (SIP).

For example let us assume that Ramesh invests Rs 1,85,000 in Advantage Deposit for 5 years paying an interest of 7% per annum. The total annual interest payout in this case will be Rs 12,102 (monthly payout – Rs 1008). So the Rs 1008 will be credited to Ramesh’s Savings Account every month. The Rs 1008 will be automatically debited through a Standing Instruction / ECS mandate and invested in a mutual fund.

Features of Advantage Deposit

·          Duration: The minimum duration of the deposit is 1 year and the maximum duration is 10 years.

·          Requirements: The customer needs to submit the duly filled fixed deposit account form with the KYC documents; if it’s the first relationship with the bank. The customer also needs to have a savings account for the credit of monthly interest. The customer also needs to submit the Systematic Investment Registration (SIP) form.

·          Interest Payment Frequency: The interest is paid out monthly and is credited to the savings account from where it is again debited and invested in a mutual fund through a SIP.

·          Minimum Deposit Amount: The minimum amount that needs to be invested in the fixed deposit depends on the interest rate and the TDS rate. The fixed deposit amount should be such that the monthly interest payout amount after deducting the TDS should be equal to or more than the SIP amount. The minimum monthly SIP amount is Rs 1000. So in short the minimum monthly amount that should be credited to the savings account after the deduction of TDS should be Rs 1000 or more.

·          If the monthly interest earned on the fixed deposit is lower than the SIP amount due to TDS rate or lower interest rate on renewal; then the depositor has to make up for the shortfall in the Savings Account.

·          Nomination: Nomination facility is available for the fixed deposit account.

·          Premature Withdrawal: Premature or partial withdrawal is allowed. In this case the deposit may be subject to penalty. Premature withdrawal is also allowed from the mutual fund subject to applicable conditions.

·          The capital invested in the FD is secure. The monthly interest investment through the SIP evens out the volatility in equity markets.

How does the Product Work?

The fixed deposit amount to be invested in this product should be such that the monthly interest after deducting the TDS should be equal to or more than the SIP amount. The minimum SIP amount is Rs 1000.

For example let us assume that Ramesh decides to invest Rs 2,10,000 in Advantage Deposit for 5 Years. Let us assume that the interest payable is 7% per annum.

ü        On this amount Ramesh will earn an annual interest amount of Rs 13,738.

ü        The TDS applicable will be 10.30%. So this will be Rs 1415

ü        The annual interest amount net of TDS will be Rs 12,322.

ü        The monthly interest amount will be Rs 1026.

ü        The monthly interest amount will be credited to the Savings Account. From the savings account the monthly interest amount will be automatically debited through a Standing Instruction / ECS mandate and invested in a mutual fund.

ü        Rs 1026 will be invested every month in a mutual fund for 5 years. If the mutual fund gives a return of 15% over 5 years then the maturity value will be Rs 89612.

ü        On maturity Ramesh will get back his FD principal of Rs 2,00,000 and Rs 89,612 as maturity value of his mutual fund units. So the total amount will be Rs 2,89,612.

ü        If Ramesh invests Rs 2,00,000 for 5 years in a traditional fixed deposit which pays 7% p.a. with the interest payment on maturity; then the maturity value that Ramesh will get will be Rs 2,80,510. There will be TDS of 10.30% applicable on the interest amount which will further reduce the final maturity amount.

ü        So it makes sense for a person to invest in ICICI Advantage Deposit product if he is willing to take little bit of risk for higher returns.

Disadvantages

·          In the event of closure of the deposit; the SIP amount will continue to be debited from the savings account of the depositor. The depositor has to inform the Mutual Fund for stopping the debit of the SIP amount from the savings account.

·          The minimum SIP amount is Rs 1000. To earn an interest of Rs 1000 monthly (Rs 12000 annually) the investor will have to invest a huge amount at one go. This may not be feasible for small investors.

·          The customer can invest the interest amount only in ICICI Prudential Mutual Fund through this product. This limits the customer’s choice.

 Conclusion

This product offers the combination of the security of a fixed deposit and high returns of a mutual fund. But in this product the choice of mutual funds is restricted to funds of ICICI Prudential Mutual Fund. To overcome this limitation the investor can investor in a monthly paying fixed deposit or a debt mutual fund and invest the interest amount in any mutual fund of his own choice. But an investor who is not aware of this process and wants to save himself from the hassle of actively managing his own portfolio should go for this product.

This article is written by Gopal Gidwani. He can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it  for any queries on Financial Planning, Tax Planning and Investments. He is an qualified Associate Financial Planner (AFP) in Investment Planning, Tax Planning, Insurance Planning and Retirement Planning