Dear Friend,

Thank you for visiting my Blog. Not all of us were born in a rich family and we always think about retiring as a CROREPATI. Thinking is one thing, have you done anything to achieve that dream?

In order to become rich, you have to invest and do it wisely. For that you need knowledge and ideas. There are a few good books that I have published which you can buy for a nominal price which can help you with that.
With the New Year on the horizon, the price of all the books have been slashed by 50% or more.

To know more about these books, their price and check out a sneak preview, please Click Here...


Best Wishes!!

Anand

Thursday, January 19, 2012

Get a 2 Crore Pension by Investing Rs. 8000/- per month



The title sounds cool, doesnt it?

Yesterday, i received an email from an online Insurance Quotation website that said “Get Rs. 2 Crore Pension for just 8K pm“. As always, i was curious and opened the email.

Part of the email looked like below:


I clicked on the “Know More“ buttons for either option. Wouldnt you? As salaried individuals, A Crore is a hugeeeee sum of money and the prospect of becoming a Crorepati was more than Inviting. When i clicked on the buttons, the first shock hit me...

The Page which opened on clicking the “Know More“ button for the 1 Crore Pension said Total Returns = Rs. 66 lakhs

The Page which opened on clicking the “Know More“ button for the 2 Crore Pension said Total Returns = Rs.1.36 crores

Now tell me, wasnt the title totally misleading? The advertisement has offered a Return of 1 and 2 crores respectively, while the actual policy mentions projected returns as 66 lakhs and 1.36 crores respectively. The best part is, there is a disclaimer which says, the actual returns may not be that much. Where is 1.36 crores and where is 2 crores? The best part is, in either cases the 66 lakhs or 1.36 crores can be achieved only if we invest in the full Equity orinted fund option which is extremely high risk. If you chose a balanced or a debt oriented fund profile, the returns would be much lower than what is projected in the ad.

This is the kind of mis-selling of Insurance policies that I have always talked about. It was even one of our Financial Resolutions for 2012. To know more about the resolution click here

Ok. As the usual curious cat that I am, I proceeded to read the policy details to really see if the fund can atleast return the amount as promised in the website (I forgot the advertisement email)...

Both of these pension options were for the same Unit Linked Insurance Plan offered by a prominent Insurance Company.

Note: Guys, I am not taking either the name of the Insurance website or the Insurance company in this post. I dont want to criticize anyone. As Investors it is upto us to be vigilant and cautious. If someone fools us, it is our fault and not the other guys. If we were careful, it wouldnt have happened in the first place. Wouldnt it?

Lets take the 2 Crore Advertisement and Analyze it. The Plan is as follows:

1. I Invest Rs. 1 lakh per year for 5 years making a total investment of 5 lakhs
2. I can select from a variety of investment options that range from fully debt oriented to fully equity oriented (The Returns in the examples in the policy advertisement are based on a full equity oriented option which is extremely high risk)
3. I get an Insurance Coverage/Sum Assured of around 30 lakhs - In case anything happens to me in the next 30 years, my family will get a guaranteed amount of 30 lakhs or the existing Fund Value, whichever is higher
4. Partial Withdrawals are allowed after a full 5 years of paying the premium
5. Tax Benefits under section 80C for upto Rs. 1 lakh (Assuming you have no other investment that will give you benefits under section 80C)

At the outset, if I see, I am investing a total of 30 lakhs over a period of 30 years and at the end of which, they are projecting (Not Promising) Rs. 1.36 crores.

Below is a table that would show how our investment would progress if the Rs. 1.36 crores is to be reached by this policy.

Year No.Invested Amount
(In Rupees)
Rate of Interest(%)Interest Earned this year
(In Rupees)
Fund Value at the end of the year
(In Rupees)
110000012.512500112500
221250012.526562.5239062.5
3339062.512.542382.8125381445.3125
4481445.312512.560180.6640625541625.9765625
5641625.976562512.580203.2470703125721829.223632812
6721829.22363281212.590228.6529541016812057.876586914
7812057.87658691412.5101507.234573364913565.111160278
8913565.11116027812.5114195.6388950351027760.75005531
91027760.7500553112.5128470.0937569141156230.84381223
101156230.8438122312.5144528.8554765281300759.69928876
111300759.6992887612.5162594.9624110941463354.66169985
121463354.6616998512.5182919.3327124811646273.99441233
131646273.9944123312.5205784.2493015411852058.24371387
141852058.2437138712.5231507.2804642342083565.52417811
152083565.5241781112.5260445.6905222632344011.21470037
162344011.2147003712.5293001.4018375462637012.61653792
172637012.6165379212.5329626.577067242966639.19360516
182966639.1936051612.5370829.8992006453337469.0928058
193337469.092805812.5417183.6366007253754652.72940653
203754652.7294065312.5469331.5911758164223984.32058234
214223984.3205823412.5527998.0400727934751982.36065513
224751982.3606551312.5593997.7950818925345980.15573703
235345980.1557370312.5668247.5194671286014227.67520416
246014227.6752041612.5751778.4594005196766006.13460467
256766006.1346046712.5845750.7668255847611756.90143026
267611756.9014302612.5951469.6126787838563226.51410904
278563226.5141090412.51070403.314263639633629.82837267
289633629.8283726712.51204203.7285465810837833.5569193
2910837833.556919312.51354729.1946149112192562.7515342
3012192562.751534212.51524070.3439417713716633.0954759
As of Now, the rate of returns, this policy would have to give in order to achieve the 1.36 crore target is 12.5% per year.

Do you reall think, any Investment can generate a nearly 12.5% rate of returns consecutively for 30 years? The Stock Market is known to offer returns in excess of even 20% or 25% but, consecutively for 30 years? Practically not possible isnt it?

Ok, lets get down to further details.

Fee’s Associated with the Policy:

The following Fee’s are applicable on the policy:

1. Premium Allocation Fee - 6% for the 1st year, 4% for year 2 to year 5, 0% from year 6 onwards (If premium is less than Rs. 1 lakh, there is a 2% premium allocation fee from year 6. But, in our case, we are going to pay premium only for 5 years. So there is no fee.)
2. Fund Management Charges – 1.35% of the fund value per year
3. Policy Administration Charges – 0.1% of Premium or Rs. 400 whichever is lower. In our case Rs. 100 every month.
4. Mortality Charges – Around Rs. 1.4/- for every Rs. 1000/- Sum Assured per year. In our case the Sum Assured is around 30 lakhs. So, this fee works out to Rs. 4200/- per year
5. Plus other fee related to Riders that you may choose
6. Service Tax and Educational Cess

So, if we factor in all the fee that we may have to pay for this policy, the net returns our policy has to generate will go much higher than the initial 12.5%.

Coming back to the title “ Can you Really Get a 2 Crore Pension by Investing Rs. 8000/- per month?“

No.

Even if we assume that the full1 lakh we invest is invested, the fund has to generate a returns of nearly 15% every year, without fail for 30 full years to achieve the elusive 2 crore pension mark. Unfortunately, there is a host of fee that will eat atleast 2-3% of your investment every year which means, your fund has to earn that much more extra interest to achieve the 2 crore mark.

Realistically speaking – any good fund manager will be able to generate an average returns of around 9 - 10% if we consider the market ups and downs. When the equity markets are good, the returns may go up to even 25% and when the markets are bad, the returns may fall to even 0% or worse, generate losses.

Are you thinking this? “Anand, in the initial paragraph, you have mentioned that there is an Insurance Coverage/Sum Assured of around 30 lakhs. So, what kind of returns must the policy generate to meet that number?“

Well, in the previous paragraph, I have mentioned that the realistic rate of returns we can expect is around 9 - 10%. In order to achieve the 30 lakh sum assured, the fund would have to generate a return of around 7% every year. This is a realistic number and quite possible if the equity markets perform well for atleast 15 of the 30 year investment period.

As a whole, the policy looks like a decent investment if we consider the realistic returns of 10%. At such a rate, this policy will grow to around 60+ lakhs at the end of 30 years. Considering that you only invest 5 Lakhs in the first 5 years, this is very good returns. But, if you are someone who dreamt of the 1 crore or 2 crore pension after seeing the Advertisement, this policy is not for you.

Some Last Words:

As I have always said, being vigilant and cautious should be your NUMBER ONE RULE when it comes to making investment/insurance decisions. Be Cautious, Do your Homework, Ask Experts and Expect Realistic Returns from your investments to avoid Disappointment...

Happy Investing Folks!!!!

10 comments:

  1. Thanks Anand, Very Helpfull Indeed. Saw the same advertisement some where and did a google about the same and found your post.

    ReplyDelete
  2. Thanks Anand. For your analysis and sharing the same insight. These ads are seriously so misleading.

    ReplyDelete
  3. Thanks everyone. Even if 10 people are made aware of such faulty advertisements and dont buy such products, I would consider my purpose served :)

    ReplyDelete
  4. Good Analysis... lot to learn from this..!!!

    ReplyDelete
  5. Thanks Anand for teaching us & showing us graphs & tables on how an investment really looks like
    after all this misleading ads which pop out of nowhere.I will try to be vigilant after this and
    to all who has read Anand's review please learn and follow his footsteps coz he's very right in
    whatever he has explained so far.I hope you will! CARFULLY INVEST BYE

    ReplyDelete
  6. Nice !!! learned which I wanted to know from long time.

    ReplyDelete
  7. Thanks anand good one i too check from policy sites they called several insurance company, every one is projecting for there bonus on behalf of my money. then i decided to invest two terms
    1. PPF account for pension - 1 Lakh per annum ie 8200 per month + FDS
    2. Taking pure insurnace plan 1 crore for 8200 rupees per annum ie 10% of my annual PPF payment

    Then we got both 1 crore benfit + ganrentee retuns tax free in ppf + FD
    what do you say

    Thanks
    Murali

    ReplyDelete
    Replies
    1. Yes, this is a good choice Murali. Well done.

      Delete

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