Don't invest in Khatkhatem products choose Tax savings mutual funds instead.

A couple of weeks back I had written about an unhealthy concoction of investment products. After reading it one of the readers sent me a couple of queries on a popular messaging platform.

After carefully going through his queries and answers, here are my inputs....

1. I fully agree to his view that I need to make an apple to apple comparison, and the shortfall (27 years hence) is just Rs. 3 lakhs, but imagine that time in future when you will fall short of that same 3 lakhs for your child's wedding/ buying your dream car/house and you have to avail a loan for that purpose even after very well knowing that you could have achieved it easily by avoiding the 'khatkhatem' product.

2. I do not agree to his premise about the hassles of multiple products, as you can easily set up a direct debit (ECS mandate) in your bank account for the specified tenure for both the products, remember this needs to be done only once and the future debits will take place automatically.

3. I also differ from his view that most Indians would never psychologically invest in a term plan, as this article states that sales of online term plans are rising by 40%.

4. It is also important to note that, where pension income receive from insurance companies is taxable, withdrawals from PPF are totally tax free.

While it is great to see that my readers are financially literate (not taking the things I write for granted) and are aware of what is going on, this time I would like to build another perspective, and yes it must include Mutual Funds (what else).

I have talked about tax saving Mutual Funds (ELSS) earlier too but let us put them to use now by preparing a  Retirement Plan for the same friend I was talking about a couple of weeks back.

I have assumed that he is going to invest the same amount of Rs. 61,000/-(70,000 less term insurance premium) per year only on a monthly basis.

So, the investment per month is of Rs. 5,080/-

Let us now assume that in the next 27 yrs we will achieve only half the returns.

So 15% (approx)

Investment amount 

= Rs 5,080 x 12(months) x 27(yrs)

= Rs. 16.45lacs(approx)

Value after 27 years @ 15%

= Rs. 1.86 crores

It is clearly seen that even after applying probability of risk(50%) this investment is still worthwhile and generates better wealth in the long term.

So what are you waiting for.... start a SIP in Tax saving mutual funds today.......

Don't forget to download the friday financials app on android

Disclaimer : Funds are used for depicting long term performance and should not be construed as advice for investment.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Image source Valueresearch online 

The Khatkhatem of investment products

It's heartening to know, so many of you have visited my blog even though it's been a long time that I have written anything, but believe me, nothing interesting was happening that I would have liked to share with you all, till yesterday.

Case study

Yesterday, (yes I know it was a Holiday but I was working/helping) I was approached by a friend who had been advised by an "insurance adviser/consultant" on a certain investment cum pension product with added life cover from a well reputed insurance company.

In konkani cuisine, there is a very nutritious and ethnic dish called 'khatkhatem', which is essentially a curry of a variety of  vegetables. While the essence of this dish is to provide a nutritious meal to the consumer, the above combination of insurance, investment and pension is totally unhealthy and a recipe for disaster.

Now this (story) product (being from an insurance company) has three parts to it .

1. Pay an annual premium of  Rs.70,000/- for 27 years. After which my friend would get Rs, 68 lakhs at his age of 60.(graphic attached)

2. He was also going to get a life cover of 60 lakhs.

3. Invest the accumulated 68 lakhs in a pension product (of the same company) at the age of 60 to get Rs 5 lakh per anum for his lifetime. (approx 41000 pm in 27 years)

Here is what I had to say to my friend (for the sake of simplicity I advised him in 

1. Contribute the same amount of Rs.70,000/- for 27 years in a simple product like PPF, your gross returns stand at 81.6 lakhs.(graphic attached)

2. Buy a term life cover of Rs 1 crore costing Rs. 15,000 annualy. Your returns even after deducting the term life premia from the PPF investment are 0.55% more and additionally you are getting 9.6 lakhs.

3. Pension always needs to be linked with inflation. If we consider a yearly expense of Rs. 2,40,000 and inflate it by 6%, then in 27 years my friend would need about 11.57 lakhs per anum, what good will that 5 lakh pension for life do if his requirement is more than double of that?

Coming back to the pension requirement from age 60 yrs, if I trace back the retirement corpus my friend needs, based on a yearly expense of 2.4 lakh, a figure of nearly Rs. 2 crore pops up. Mind you this is the inflation adjusted figure unlike a fixed pension beneift.

This friend of mine is risk averse, (In India who isn't?)  Hence my advise to him was, don't invest in Equity Mutual funds, but stick to simple products and you are much better off than falling prey to a mis - seller. In the coming years you can increase your investment whenever your income increases.

Cost: 

The commissions that agents selling mutual funds, Reserve Bank of India and other bonds and Post Office deposits, as compared to that received by insurance agents are a scandal. The commissions are enormous, generally around 15 per cent of first year premiums and 7.5 per cent in the second and 5 per cent from the third year onwards. For a financial product that is supposed to be an investment, this is a shocking level.

The above incident was a clear case of buyer beware. If you buy insurance as investment then your fixation for Guaranteed returns will ultimately pinch you very hard in the pocket, not necessarily right away but surely in the years to come. More importantly, buying illiquid insurance products will only diminish your choice of savings.

So, don't invest in Mutual funds, but don't hit yourself in the foot by buying unhealthy investment products from insurance companies, Agreed that their job is to sell, but it is for you to decide whether that concoction suits your financial life.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

www.letsmakeaplan.in

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Insurance = Insurance

Welcome all, to the new year 2014.

What an unusual title to this post you might think...but the truth is that most of us have not insured ourselves adequately, neither life or health wise. We have just made Investments in the name of Insurance, without even considering whether our Long Term Financial Goals will be met through these "investment" choices or not.

Why do we "invest" in Insurance?

1. For generations together Insurance Agents have been brainwashing investors into thinking that taking a simple term cover is a stupid thing to do.

2. Advertising and marketing has reached newer highs (bringing newer lows to investors)

3. There is a fixation for "guaranteed returns"

This year though, things are different. IRDA(the regulatory body of Insurance products in India) has implemented various changes which has forced insurance companies to change their product structures and offer "newer and better investor friendly products".

But seriously, I do not wish to talk and waste this space on these changes, simply because, the fact remains that all of us really need two types of Insurance products in our lifetime...

If a child, a spouse, a life partner, or a parent depends on you and your income, you need life insurance.

Suze Orman 

How to calculate your life Cover:

1. Assess time left for your retirement.

2. Cover your debts/loans so that they can be paid off straightaway. Home loans already have this provision.

3. Provide for future expenses by estimating inflation, including education for children.

4. Estimate what living expenses are going to be and the investment needed to yield that much return. 

OR

You could use this simple excel tool to calculate how much life cover you require.

Once this is done you can go to step 2 i.e taking a mediclaim/health insurance cover.

Health insurance should be a given for every citizen.Jesse Ventura 

Health care costs are escalating at a much higher rate than inflation. In 2013 they were up by 22%, needless to say, having a family health cover is a wise choice, unless you would like to destroy your savings by paying medical bills.

As a thumb rule a basic family cover of at least Rs.5 lacs is very much recommended. What more, you can claim a tax deduction for the premium paid(subject to IT rules).

Fun is like insurance; the older you get, the more it costs.

Kin Hubbard 

All aspects of a Financial Plan are interlinked, if you buy insurance as investment then your fixation for Guaranteed returns will ultimately pinch you very hard in the pocket, not necessarily right away but surely in the years to come. More importantly, buying illiquid insurance products will only diminish your choice of savings.

Buy Insurance as Insurance only and not as an Investment.

Ninad Kamat

CERTIFIED FINANCIAL PLANNER^CM

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Image source: http://www.ahealthiermichigan.org

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