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- Returns from your Endowment Insurance Policy
- Compare Mutual fund returns with Bank fixed deposit returns in bull and bear Stock Markets
- How to calculate indicative returns from FMP NFOs?
| Returns from your Endowment Insurance Policy Posted: 14 May 2014 05:11 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Endowment insurance policies have always been very popular in India. The advent of ULIPs had an impact on the popularity of endowment policies, but they still continue to be quite popular. If you had bought your life insurance policy 10 or 15 years back, most probably it would have been an endowment policy. Endowment plans are hybrid life insurance and investment instruments. In the event of an untimely death, at any point of time during the term of the policy, the family of the policy holder gets the insurance cover, also known as sum assured. On maturity, the policy holder gets a guaranteed amount (also known as sum assured) and a bonus amount. In this article we will discuss, how endowment insurance policy holders can calculate the return on their investment. In the case of endowment plans, the investment made by the policy holder is the total premiums paid over the term of the policy. We will discuss how to estimate the maturity amount, with the example of endowment plans from Life Insurance Corporation (LIC). However, you can use this method to calculate returns from endowment plans of other insurance companies, with suitable adjustments.
How do endowment plans generate returns?
A portion of the premium gets allocated towards the sum assured and a portion of the premium is allocated towards the administrative expenses of the insurer. The balance portion of the premium gets invested. The money that is invested generates a certain return every year. This return may be declared as a bonus. The bonus is declared usually as a percentage of the sum assured. The life insurance company may declare bonus every year, but the bonus is not guaranteed. Once declared, this bonus becomes part of the guaranteed benefits of the plan. The bonus is not payable immediately, but accrues every year and becomes payable only at maturity or a death claim.
Types of bonuses
LIC offers three types of bonuses:-
Let us see now with an example, how to calculate the return of your endowment plan. Let us assume you bought an endowment plan in 2002 with a sum assured of Rs 10 lakhs and policy term of 20 years. Let us assume, you were then 30 years old and your premium would be around Rs 50,000 per annum. Further, let us assume you have opted for annual premium payment. Your policy will mature in 2022. Let us estimate what your maturity amount will be in 2022.
The table below shows the bonus declared by LIC since 2003.
The table below shows the Final Additional Bonus (FAB) declared by LIC by duration and sum assured in 2013
Normally policies which have regular bonuses do not have loyalty additions. Let us assume that, this policy does not have loyalty additions.
Let us now estimate what the final maturity amount will be. First we need to forecast, how much bonus LIC will declare on an annual basis, over the balance term of the policy. Over the years the bonus declared by LIC is coming down, as is evident in the table above showing bonuses from 2003 to 2013. In 2003 the bonus was Rs 61 per Rs 1000 of sum assured (SA). In 2013 it is only Rs 42 per Rs 1000 of SA. We will analyze 2 scenarios (you can analyze as multiple scenarios as you want based on your own assumptions).
Scenario 1: Bonus is flat at Rs 42 per Rs 1000 of SA for the balance term of the policy
For the balance term, 2014 to 2022, the bonus will be Rs 42 per Rs 1000 of SA every year. Let us assume the FAB will be Rs 70 per Rs 1000 of SA, as per 2013 rates (see FAB table above). Let us now estimate what the maturity amount will be. See the schedule below.
The maturity amount is Rs 19.59 lakhs. The total premium paid by you is Rs 10 lakhs. Since the investment is made on a periodic (annual) basis, we should use IRR to calculate the returns. The return of the endowment plan in this case is 6%.
Scenario 2: Bonus declines to 40 / 1000 SA from 2014 – 19 and 38 / 1000 SA for the balance term
From 2014 to 2019, let us assume bonus is Rs 40 per Rs 1000 of SA (5% lower than current rates) and Rs 38 per Rs 1000 of SA (10% lower than current rates) from 2020 – 22. FAB will be Rs 70 per Rs 1000 of SA, as per 2013 rates (see FAB table above). Let us now estimate what the maturity amount will be. See the schedule below.
The picture does not change all that much.
The maturity amount is Rs 19.35 lakhs and the return is 5.9%.
Investors should note that the maturity proceeds are tax free.
Conclusion
Investors, who rely on endowment policies for their retirement planning, will probably realize that the maturity proceeds will not be enough for their retirement and therefore can plan accordingly. It is important that investors clearly know what to expect from their endowment policies, so that they can go about their financial planning in a thoughtful way.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
2.Franklin India Smaller Companies E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
| Compare Mutual fund returns with Bank fixed deposit returns in bull and bear Stock Markets Posted: 14 May 2014 04:14 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
When it comes to mutual funds or equity investing, various perceptions are usually at play in the minds of the investors. Share markets are speculative. They can give good returns, but the investor can also lose a lot of money. As such, most investors in India prefer the safety of fixed deposits, which guarantees capital protection along with assured returns. While it is true that equities oriented mutual funds are riskier than fixed deposits, equity market professionals argue that equities provide much higher returns than fixed deposits in the long term. But many investors are still not impressed with that argument. Ask the investors who lost a huge portion of their equity investment in 2008. Investors are seen to be more biased to the avoidance of negative experiences. In psychological term, this is known as negativity bias, by which we recall bad memories more easily and in greater detail than good ones. This negative perception of risk associated with equity markets, still seems to be ruling the minds of average Indian retail investor despite the recent bullishness in the market. In this article, we will not go into perceptions regarding equity markets. Rather we will objectively look at returns given by mutual funds and fixed deposits, over the last 10 year period across different market cycles, both bull markets and bear markets. Investors can see for themselves, to what extent is their perception aligned with reality.
In the last 10 years we have gone through a long bull market from 2002 to 2007, recently again over the past year or so, and intermittent periods in between. However, during this period we also went through one of the worst recessions in 2008 and then again in 2011. By analyzing returns across both bull and bear market cycles investors can evaluate for themselves the risk return trade off for equity funds versus fixed deposits. It is important to note here that mutual funds are essentially long term investments. For our analysis, we have assumed that the investment time horizon in mutual funds is 5 years. We will examine the returns given by mutual funds over 5 years versus fixed deposit returns, for the period from 2002 to 2013 which included both bull and bear market periods.
For our equity investment, we have taken an average large cap equity fund. For our fixed deposits, we have taken the average interest rates offered by different banks over the last 10 years. The point to note here is that the difference between the highest and lowest fixed deposit rate offered by different banks is not all that much, but the difference in the returns between top performing funds and the category average was easily 5 – 6%, if not more. But we have decided to stick with large cap category average, lest are we accused of equity bias. The chart below shows the average category returns for large cap funds since 2002.
Therefore as per the chart, above if an investor invested Rs 10,000 in an average large cap fund at the end of 2001 and redeemed his units after 5 years at the end of 2006, his investment would have grown to Rs 43,788. Similarly, if the investor invested Rs 10,000 in a large cap fund at the end of 2002 and redeemed his units after 5 years at the end of 2007, his investment would have grown to Rs 59,484. Long term capital gains in equity funds are tax exempt. Therefore the investor would not have to pay any tax on his returns.
Now let us look at the average fixed deposit interest rates over the last 10 year period. The 1 to 3 year term rate is usually the highest fixed deposit rate. The rates for longer terms, e.g. 3 to 5 years and above are usually lower.
For the fixed deposit investment, we have assumed that the investor does a term deposit of 1 year (which usually has the highest interest rate) and renews it every year at the new rate. Since fixed deposit rates have been usually increasing year on year over this period, except a couple of years, this strategy would have worked best for the fixed deposit investor. If the investor invested Rs 10,000 in an FD at the end of 2001 and renewed it every year for 5 years, his principal and interest would amount to Rs 13,300 at the end of 2006. Fixed deposit interest is taxed as per the income tax slab rate of the investor. Assuming the investor is at the highest slab rate, the tax will be Rs 1,029. Therefore the post tax amount received by the investor would be Rs 12,301. Similarly, if the investor invested Rs 10,000 in an FD at the end of 2002 with annual renewal for 5 years, his post tax amount at the end of 2007 will be Rs 12,597.
As you can see, mutual fund returns beat fixed deposit interest by a wide margin in the bull market years, But what happened in the bear market years? The table below shows 5 year growth of Rs 10,000 investment, made at the end of various years from 2001 to 2008.
All investments made after 2003 (shaded in amber in the table above) had to go through bear markets of either 2008 or 2011 or both. Now, please take a look at the line "Capital Gain / (Loss). Investors with a five year horizon did not make a loss in the above example, except the investment made in the 2007 to 2012 time horizon. Even the investment made in the 2007 to 2012 time horizon, probably worst years of the financial crisis in the last 50 years, lost less than 2%, only Rs 181 loss on the Rs 10,000 investment. It is here, that we should revisit risk perception. There is no denying that equities are risky. But if you have a long time horizon, your investment can recover from the negative impact of a bear market and give you good returns. The table above shows that in the most of the periods the investors doubled their investment tax free despite the severe bear market.
Now let us look at Fixed Deposit post tax returns. The table below shows 5 year growth of Rs 10,000 investment, made at the end of various years from 2001 to 2008.
Let us compare the fixed deposit returns with the mutual fund returns. See the chart below, for the mutual fund returns versus fixed deposit returns over different 5 year time horizon over the last 10 years.
The chart above shows that while fixed deposits assure capital safety and guaranteed returns, mutual funds over a sufficiently long horizon have given much higher returns. Mutual fund returns are much higher in the 5 year time horizons starting 2002 to 2006. In the 2006 – 2011 and 2007 – 2012 time horizons, fixed deposits have given higher returns, no doubt as a result of the severe market downturns in 2008 and 2011. Again starting 2009, mutual funds have started to give better returns. When evaluating risk return trade off between mutual funds and fixed deposits, investors should compare their returns over sufficiently long period comprising of both bull markets and bear markets, as discussed above. The investment horizon is also of vital importance in determining the risk return trade off. It suffices to say that, if the investment horizon in our example was short, say 1 to 2 years, mutual funds would have had more periods of under performance.
Conclusion
In conclusion, we will go back to risk perception. Ultimately, the investor's perception of risk influences his or her risk appetite. As discussed in our article, Measuring Risk Tolerance of Investors, the investment decision of the investor should be governed by his or her risk tolerance and not risk appetite. However, when it comes to actual decision making, one cannot wish away the influence of the investor's perception of equity markets on their decision making. In this article, we have shown that if the investor remains invested for a sufficiently long time horizon, equity funds can give good returns despite difficult market conditions.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
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 Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
2.Franklin India Smaller Companies E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
| How to calculate indicative returns from FMP NFOs? Posted: 14 May 2014 02:36 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
In a previous article we had discussed that, in the last one year top performing Mutual Fund Fixed Maturity Plans have given better returns than bank fixed deposits even on a pre tax basis. On a post tax basis, FMP returns are even better than FDs because while FDs are taxed at the applicable income tax slab rate of the tax payer, FMPs are subject to capital gains tax at 10.3% without indexation benefit and 20.6% with indexation benefit. However, bank fixed deposits are more popular than FMPs because while banks can tell investors how much interest they will pay, investors in FMPs have little clarity on how much returns they will generate. In this article, we will discuss how investors can calculate estimated return from FMP new fund offer (NFO), so that they can compare the returns with the fixed deposits and other short term debt investments, before making an investment decision. SEBI now allows close-ended debt schemes to disclose instruments in which they propose to invest as well as floors and ceilings within 5 per cent range of the intended allocation. This information, available in the scheme information document or offer document of the new funds offering (NFO), can help investors get more clarity on the returns they can expect from the FMPs. Fixed maturity plans are close ended schemes that aim to generate income for the investors in a fixed term, by investing in debt securities such as treasury bills (T-bills), commercial papers (CPs), certificates of deposit (CDs), government and corporate bonds. FMPs are open for subscription for a limited period. Investors cannot redeem FMP units before maturity. While investors can sell FMPs on stock exchanges, the liquidity of FMPs before maturity is quite low. As such investors should buy FMP units with a view of holding them till maturity. Before we discuss how to calculate expected returns from FMPs, let us briefly review the different types of debt instruments that the FMPs invest in. · Government Securities (G-Secs): These are debt instruments issued by the RBI on behalf of Government of India. There are both short term and long term instruments. The short term instruments, also known as Treasury Bills, have maturities of 91, 182 and 364 days. The long terms G-Secs have maturities ranging from 1 to 30 years, and offer fixed interest rates. Government securities have zero credit risk · Corporate Bonds or Debentures: These are issued by private and public sector companies. These instruments carry credit risks and are rated by the rating agencies like CRISIL, ICRA etc. Higher the credit risk, higher is the interest paid by the bond issuer. · Certificate of Deposits (CDs): CDs are money market instruments, issued by banks and financial institutions for maturity periods ranging from 7 days to 3 years · Commercial Paper (CPs): CPs are also money market instruments, issued by corporate entities for maturity periods ranging from 7 days to 365 days. While these instruments have various maturity periods, fund managers of FMPs try to match the maturities of their debt instruments with the maturity of the scheme, so that they can minimize re-investment risks. FMP offer document should clearly articulate the instruments (described above), in which the scheme plans to invest and in what proportion within a 5% range of intended allocation. The offer document should also mention the credit quality (e.g. A1, AAA, AA etc.) of the instrument and expected yields. It must be mentioned here that, the details provided in the offer document, differs from AMC to AMC, but most reputed AMCs provide enough details to enable the investors to calculate expected returns. In this article, we will how to calculate the expected yield of a FMP with a few examples using the information available in some upcoming NFO offer documents. Please note that the estimated are only indicative. The actual return will depend upon the actual allocation to the various instruments and the actual yields.
Example 1: Tata Fixed Maturity Plan Series 47 Scheme E · Fund Launch Date: 03/04/2014 · Fund Closure Date: 09/04/2014 · Maturity: 371 days · Indicative portfolio (see the offer document)
· Expected Yields (see the offer document)
· Calculation of expected returns
Example 2: Birla Sun Life Fixed Term Plan - Series LA (366 days) · Fund Launch Date: 04/04/2014 · Fund Closure Date: 07/04/2014 · Maturity: 366 days · Indicative portfolio (please see the offer document)
· Expected Yields (see the offer document)
· Calculation of expected returns We need to make some assumptions here. 1 - Allocation: Since the largest allocation is to NCDs, let us assume the average of the range 95 – 100% which is 97.5% is allocated to NCDs. Let us the assume the balance 2.5% is equally allocated to CDs, CPs, G-Secs/ CBLO/ REPO/ Cash Management Bills/ Fixed Deposits and mutual funds, at 0.625% each. 2 - Since the offer document does not provide the AA bond / NCD yield, we have to make an intelligent estimation of the yield. Analysis of bond yields (available in business dailies and financial websites) will show that spread between yields of AA and AAA of same maturities, is 30 to 40 basis points (0.3 – 0.4%). In order to estimate the yield of 1 year AA rated corporate bond or NCD, we should add 0.4% to the yield of AAA rated corporate bond or NCD. Therefore, the yield of the AA rated corporate bond can be estimated to be 10.1 – 10.2% 3 - Since the offer document, does not provide CD yield, we have to make an estimation of the yield. Analysis of CP and CD yields (available in business dailies and financial websites) will show that spread between CD and CP yields (of same maturities) is 30 basis points (0.3%). Therefore the CD yield can be estimated to be 9.1 – 9.2% 4 - Since we do not know the exact nature of instruments included in the category G-Secs/ CBLO/ REPO/ Cash Management Bills/ Fixed Deposits and mutual funds, let us be conservative and assume the expected yield is the same as call money rate, 8.85 – 9.05%. It really does not make a big difference to the final yield of the FMP, because the allocation to these instruments is only about 1.2%. Once we have made these assumptions, which are fairly straightforward, we can calculate the expected returns of the FMP.
Conclusion In this article, we have discussed how to calculate with a certain level of confidence, the estimated returns from a Fixed Maturity using the information available in the offer document. We went through two examples, one (Tata) in which most of the information is available in offer document, and another (Birla Sunlife) in which the investor had to make some reasonable assumptions. Further, FMP investors should remember that FMPs are more tax efficient than other debt investments (please refer to our article, Top performing FMPs have given better returns than Bank FDs, for calculating capital gains with indexation). FMP investors need not go into their investments blind, or discard it straightaway because they do not have clarity of returns, compared to FDs which give assured returns. While the estimated returns are only indicative, it gives the investor a sense of how much returns can be expected from FMPs, especially compared to fixed deposit interest rates.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
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 Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
2.Franklin India Smaller Companies E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
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