Often we come across attractive advertisements made by renowned Banks, Insurance Companies, unscrupulous wealth managers or bank officials, trying to sell, or rather, mis-sell their unattractive products (in terms of investment opportunities) to consumers. The main issues with such selling of products are:
- Firstly, they are not tailor-made. A same product, lets say for example, ULIP (Unit Linked Insurance Plan) would be pitched to all the clients, in order to reach their sales targets, without checking the risk appetite, needs and goals of the investor,
- Secondly, these products, come with high costs in the forms of brokerage, commission etc, thus leading to lower rate of returns to the investors.
- Thirdly, they misguide the investors to buy the products, deeming them to be extremely safe, tax efficient and best ones in the category, without giving complete knowledge to the investors and then letting the investors pick the best option for themselves.
Let us look at some ways of selling the products, which may not be useful to the consumer per se, and also burst the bubble by mis-selling by actually understanding what the underlying product offers. Before accepting any investment offers from Banks or any institution, it is always better to analyse the product and then invest in it.
1. Selling a product, which gives you tax benefit during investment, will give you periodic returns and also, a fixed lump sum at maturity. (All of them being Tax-Free).
At a first glance, the plan sounds fine. Say for example, a 30 year old is asked to invest 65,000 per annum, for 20 years and after every five years i.e. at 5th year, 10th year, 15th year and 20th year, he will get survival money back of Rs. 150,000 each other and at the time of maturity, the survivor shall get an assured sum of Rs. 5,00,000 plus a bonus of Rs. 3,00,000.
Now, when we check the actual rate of returns, it’s barely resulting in an Internal Rate of Return of 2.8%, which is lesser than Savings Bank Deposit!
So is this really a beneficial deal for you as an investor? No doubt the money back policies of insurance provide an assured Insurance, but in this case, Term Insurance prove to be much better a deal.
2. A product, which helps you save taxes on investment, allots you units (just like Mutual Funds or ELSS) based on investment and also provide insurance cover.
What basically is being sold to you is ULIP i.e. Unit Linked insurance plans. Insurance has become one of the most sought after tax-saver product due to its exuberant selling technique, without even letting the consumer understand the brokerage behind ULIP, lock-in period and returns provided so far.
Equity Linked Saving Scheme (ELSS) is a better tax saving option, since the brokerage paid on ELSS is far less than that paid on ULIPs, the lock in period is just of here years, as against five years of ULIP and returns generated from ELSS in the past have been as good as 12%-20% p.a.
3. A Product which provides you benefits similar to a fixed deposit, gives tax free returns and also an insurance cover.
A simple bank deposit, even though providing lesser returns than market linked investment opportunities, would still be providing you with better returns than an ENDOWMENT INSURANCE PLAN. An endowment plan keeps an investor locked in for years, surely it provides insurance, but the returns provided are pretty meagre.
These days, many mutual fund houses have come up with Mutual Funds schemes which provide insurance cover to the investor till a certain age. And as it, a Term insurance policy would provide much better cover at lower rates than an Endowment policy.
4. Instead of investing in National Pension Scheme, go for Insurance Annuity Schemes.
There are various annuity schemes available by different insurance houses, which will support the investor in form of pension, however, National Pension Scheme has more benefits than that provided by Insurance houses, like the rate of return provided by NPS, additional Tax benefits and also, the tax benefits provided at the time of maturity, is better than that of Annuity plans provided by insurance.
Thus, if your broker recommends you Annuity plans provided by insurance houses, compare the tax benefits, amount to be received at maturity and pension amount provided till death, and benefits to the nominee as compared to NPS and then take the step of investing.
Before making any investment plans, it is always advised to understand the scheme, its benefits and your requirements. If it is not possible for you to yourself do the research, then approach a financial advisor who will work in your best benefits and guide you rightly.
We, at RichVik, aim to provide you with services which are in the best interest of the client. To know more on investments which are tailor made for you, feel free to contact us at Richvik.