Prajna Capital |
- Should you invest in guaranteed income plans?
- Invest in right schemes to save on tax
- The Merits and De-merits of closed ended Mutual Funds
| Should you invest in guaranteed income plans? Posted: 04 Dec 2013 03:17 AM PST Invest In Tax Saving Mutual Funds Online Call 0 94 8300 8300 (India) Guaranteed returns may work for you in the short term; in the long run it could leave you poorer Would you be interested in an investment plan that bundles an insurance cover and guaranteed payouts. Investors seem to prefer guaranteed return financial products and life insurance companies are trying to make the most of this investor mindset.
Guarantee is a very powerful word in any sales pitch. Insurers also use guarantees as a sales pitch, but it's important to see the kind of guarantees being given. Some of the recent insurance plans are tailor-made to give you a guaranteed periodic income for a certain number of years, along with a basic minimum insurance cover. But before you settle for such insurance policies it's important to know the return on investment, something these insurance policies don't declare upfront. You need to understand that if it is an investment you are seeking, you need to consider what the return on this investment is, and not get caught in the web of a smart sales pitch.
We reviewed three guaranteed-income insurance plans recently and conclude that these plans are bound to entice at first glance, but fall short when the return on investment metric is calculated. To help you see through the lure of guarantees, here is a decoder on guaranteed income insurance plans. You decide if you still want to buy.
What are guaranteed income plans? These are non-participating traditional insurance plans. As traditional policies go, these plans do not disclose costs or investments. But since the investment benefits in these plans are not linked to the performance of the underlying fund, in insurance parlance this is referred to as non-participating, they are required to guarantee investment benefits upfront. A guaranteed insurance plan is attractive not only for the buyer but also for the seller. A non-participating insurance policy is generally more capital-efficient because insurers can retain the entire profit from the portfolio. By guaranteeing small benefits upfront the insurer is able to reduce capital strain.
The way these policies work is like this. Depending upon your age and the sum assured or insurance cover chosen, you pay an annual premium for a certain number of years. This is also called the premium payment tenor (PPT). After PPT is over, the policy starts giving a regular guaranteed payout for a certain number of years. This can also be called the payout tenor. At the end of the term the policy would usually give the sum assured or a percentage of that sum assured and the policy would terminate. The premium payment term and the payout term together make the policy term. The insurance cover in this policy is valid throughout the policy term. How much do they return? Even as the structure of the plan seems fairly straightforward, what confuses is the manner in which the payouts are mentioned. For instance let's look at Bharti AXA Life Insurance Co. Ltd's Bharti AXA Life Secure Income Plan. The first page of the brochure guarantees an annual income of 8% of the sum assured (remember this is not an 8% return, but payouts at 8% of the sum assured) broken into monthly payments during the payout phase and sum assured plus guaranteed additions on the sum assured on maturity. So even as the plan pays you a monthly income it increases the final payment, that is the sum assured, by a certain percentage.
Sample this illustration from the brochure: a 30-year-old, for a policy tenor of 20 years—10 years of PPT and 10 years of payout tenor—and a sum assured of Rs.3.11 lakh will have to pay an annual premium of Rs.50,000 for 10 years, the death benefit in this case is 13 times the annual premium.
During the payout phase of ten years, the policyholder will get an annual income of 8% of the sum assured which will be paid monthly. In this case, it works out to an annual income of Rs.24,885 or a monthly income of Rs.2,074. On maturity, the plan will pay the sum assured plus guaranteed additions accruing at a simple rate of 10% per annum of the sum assured during the payout stage. The maturity corpus will work out to a total of about Rs.6.22 lakh.
Now throughout the example you see comebacks at a rate of more than 8%, this is not the net return of your investments. Despite the seemingly generous payouts, the net return is a meager 4%. Investors are bound to mistake these rates of payout as the final return on investments. No other financial product structures returns in this form, it declares the final rate of return.
ING Vysya Life Insurance Co. Ltd's ING Guaranteed Income Insurance Plan on the other hand offers payouts at a rate of 11%, 12% and 13% of the sum assured during the payout stage along with the sum assured on maturity. Even as the first page of the brochure reads: "Choose from 3 income payout rates," you don't really get to choose as such. The income payouts depend on the PPT and premium amount that you are willing to pay; the higher the PPT or premium the higher is the rate. Again while the brochure shouts out payouts at a rate of 11% and more, the return on the policy is around 4%.
A net return of 4% is not great in the long-term. If the plan provided a minimum return of 4% and an upside it would be a good investment product.
What should you do?
Given the obvious attraction of a guaranteed product you can expect more plans to line up in the market and given the lack of disclosure on net return, your job first is to calculate the net return on the policy. Take the help of online calculators or simply consult a financial planner. Keep in mind that most long term guaranteed products will offer conservative returns and entail a cost for that guarantee.
Not only do you bring home a lower return you also end up destroying the value of your investments if you factor in inflation. This is why while guaranteed products may work well in the short-term to target specific goals, in the long term you need to focus on generating value from your corpus.
Look at other products in the market. For conservative investors Public Provident Fund is a great product to have. For investors in the lower tax bracket, fixed deposit is also a choice.
For the non-conservative mutual funds is a great option. One of the tax efficient ways is investing in mutual funds. One can opt for a diversified portfolio to build a corpus over given time period. They can then opt for systematic withdrawal plan to generate periodic income from the corpus built.
Also don't forget, insurance-cum-investment plans do not offer adequate insurance for the premium you pay. You would do well to target your need of insurance and investment separately.
Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)
Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications
These Application Forms can be used for buying regular mutual funds also
Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
------------------ Best Performing Mutual Funds
|
| Invest in right schemes to save on tax Posted: 04 Dec 2013 01:12 AM PST Invest In Tax Saving Mutual Funds Online Call 0 94 8300 8300 (India)
Investors are wary of investing in tax-saving mutual funds (equity-linked savings schemes or ELSS in mutual fund parlance) this tax-planning season, say financial advisors. The abysmal performance of these schemes in the past three years and the current higher level of the market are cited as the reasons for investor disinterest
According to Value Research, a mutual fund tracking entity, ELSS funds, as a category, have given a mere 0.33% returns in the last three years. With the tax planning season beginning in December, most companies ask their employees to submit investment declarations around this time.
Investors can avail of a tax deduction of up to Rs 1 lakh under Section 80C by investing in a host of options like ELSS, tax-saving 5-year bank fixed deposits, the Public Provident Fund (PPF) or National Savings Certificate (NSC), among others.
"Investors, who invested in ELSS three years ago, are disappointed with lower returns. Clearly, they are not keen to invest in tax-saving mutual funds again and they prefer to invest in either PPF or tax saving bank deposits," says Abhishek Gupta, certified financial planner, Moat Wealth Advisors. Investors have also become cautious about investing in stocks due to weak economic fundamentals say experts.
Since investors have not made money for three years, they have turned risk averse, and want to protect capital. That is the main reason why many investors would flock to PPF or tax-saving bank deposits.
Invest as per asset allocation However, experts frown upon such "random" tax-planning exercise. They argue that investors should consider tax planning as part of their overall financial plan and choose products accordingly. They say picking tax planning instruments on the basis of past performance alone won't help one reach the right conclusions.
Make a financial plan based on your earnings, liabilities and goals. This financial plan will tell you how much money would go into various assets like equity, debt or gold. Some part of the equity portion of this plan could go into ELSS. Advocates of ELSS also claim that it is the right time to get into stocks due to attractive valuations.
The Sensex trades at a P/E of 18 times, making valuations attractive and leaving scope for appreciation over a 3-5-year period. Experts also say that investors should also try to find out the details of the product they are investing. For example, consider the case of these disenchanted investors opting for PPF or 5-year bank deposits.
Chances are that most of them haven't thought about the different lock-in periods in these options. If you have a time-frame of five years, opt for tax-saving bank deposits. Opt for PPF only if you can wait for 15 years.
Sure, you can withdraw from PPF after five years, but for some specific purposes only. Also, you have to keep your PPF account alive by investing a minimum of Rs 500 every year. Currently, a tax-saving deposit in SBI for five years will give you an interest rate of 9%, while PPF gives you 8.7%.
However, financial planners suggest you keep tax treatment in mind while making these investments, as interest income is taxed differently. Interest earned from PPF is tax free, whereas interest income from bank FDs and NSCs are taxable. Hence, if you are in the 30% tax bracket, PPF may be a better investment from a tax perspective.
Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)
Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications
These Application Forms can be used for buying regular mutual funds also
Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
------------------ Best Performing Mutual Funds
|
| The Merits and De-merits of closed ended Mutual Funds Posted: 03 Dec 2013 11:51 PM PST Invest In Tax Saving Mutual Funds Online Call 0 94 8300 8300 (India)
The pros and cons of closed ended Mutual Funds
As closed- ended fund managers don't have to worry about redemption pressures, they can buy good undervalued stocks that may have low liquidity. However, you might not be able to get your money back before the tenure ends, as these aren't that liquid. Now, closed- ended equity mutual funds, popular a few years ago, seem to be ready to make a comeback. While ICICI Prudential Mutual, Union KBC Mutual and Axis Mutual Fund have launched closed- ended schemes in the last couple of months, Reliance Mutual Fund also launched one recently. ICICI Prudential's Value Fund Series- I, a three- year closed- end fund for which subscriptions closed recently, got ₹ 643 crore.
If the fund house has a good track record, people can invest. Personally, I am not in favour of closed- ended funds because these don't let you exit at the peak net asset value. Structurally, closed- ended funds can take concentrated portfolio bets and invest in only a few stocks, about 25- 30. That can be an advantage, as it can give you better returns. On the other hand, an open- ended fund usually has a large number of scrips that are liquid and in the large- cap segments to keep a buffer for redemption pressures.
In an open- ended fund, you can enter (invest), and exit (redeem) your units any time. But in a closed- ended fund, you can invest only when it is open for investment — during the period of the new fund offering. And, you cannot redeem your units before the closed- ended period is over. The only way to exit is by selling these on the stock exchange, though this is often at a discount to its net asset value.
Since equity investment requires time, a closed- ended fund ensures investors remain committed to the investment for a certain period. This is positive. But these may not compare well with open- ended funds. Historically, open- ended funds have done well. Overall, these are more flexible. So, if investors are disciplined and don't panic and rush to redeem investments when markets fall, it is as good as investing in a closed- ended fund.
Returns from closed- ended funds could be higher because of their concentrated bets and the themes these invest in. A value theme or a contra- theme, both long-term, take time to fructify. But the fact remains there is no tangible benefit to investors in closed- ended funds, and open- end funds will do just as well," he says. " Since liquidity is an issue in closed- ended funds, one should invest only if he/ she is sure those funds will not be required for the duration for which these are invested, say, three or five years. Distributors have been selling these funds because these funds can pay higher commissions. But investors shouldn't be lured to these funds simply because their distributors recommend those. Instead, look at the investment philosophy and whether you can stay invested in the fund for its entire lock-in. Also, consider whether the investing philosophy complements your existing portfolio.
These offer investing flexibility but you can't redeem easily before their tenure ends
In an open- ended fund, you can enter and exit your units any time. But in a closed-ended fund, you can invest only when it is open for investment — during the period of the new fund offering
Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.
Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)
Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications
These Application Forms can be used for buying regular mutual funds also
Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )
------------------ Best Performing Mutual Funds
|
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