Riskfree & Assured Returns Financial Products in India
Thanks to the crash in the equity markets and the dent in trust in creditworthiness of corporate papers, the non-equity based investment schemes are the flavour of the season. If the lure of ‘riskfree and assured returns’ scheme attracts investors, then LIC, with its latest endowment offering – Jeevan Aastha—will hit the right chord with the investors.
Like any other endowment policy, this scheme is also bundled with the dual benefits of investment and life insurance. But unlike most schemes, it promises guaranteed returns on maturity. This is probably what is driving investors to this scheme, which is scheduled to close this week. However, those who have still not invested would do well take a sneak preview before following the herd, for if the scheme has pros, it has cons too.
Notwithstanding the imbedded insurance benefit, prima facie, this scheme appears a more lucrative investment option. If one were to read its fine print, it reads as – upon survival, the insurer is liable to get the maturity sum assured (MSA) and guaranteed additions. MSA is the one-sixth of the basic sum assured, i.e. one-sixth the amount of life cover. Thus, for a life cover of Rs 1,50,000, MSA would be Rs 25,000. Guaranteed additions have been bifurcated for the 10-year and five year plans. Thus, guaranteed addition is Rs 100 per thousand of the MSA (and not the life cover) per year for a 10-year term and Rs 90 per thousand of MSA per year for a five-year term. Sounds not only confusing but also exorbitant!
To summarise the above thesis - an investor would get 1/3rd the life cover as maturity benefit for the 10-year policy and approximately 1/4th the life cover if the policy tenure is five years. Thus, for a life cover of Rs 1,50,000 for 10 years (which is also the minimum required by the scheme) the amount bound to be received on maturity is Rs 50,000. This is almost double the premium paid – subject to the age of the investor at the time of taking the policy (See Table). The entire premium, however, is required to be paid through a single payment at the time of taking the policy. Thus, an investment at the age of 25 years for 10 years in this scheme would earn risk-free compounded returns of 7.28% per annum.
However, the policy doesn’t score well on the insurance front. It makes sense only if the insurer can foresee death within the first year of taking the policy. Death of the policy owner within the first year of the policy period will ensure the beneficiaries with the entire amount of life cover and the guaranteed additions, too. However, in case the unfortunate event occurs after the first year of the policy the beneficiaries will get only one-third of the life cover with guaranteed additions from the insurance company.
While this scheme does offer decent returns, it is more beneficial to those in the lower age group. Investors in higher age bracket may consider other investment options.
NABARD’s Bhavishya Nirman Bonds (NBNB), those re-opened last week, call for an initial investment of Rs 8,750 per bond (earlier it was Rs 8,500 per bond) and return Rs 20,000 per bond after an investment period of 10 years. These bonds thus offer a post tax CAGR return of 7.97%, a tad higher than Jeevan Aastha. However, they do not qualify for the tax deduction under section 80C of the income tax act. Another product from NABARD, the rural bonds, currently offer 8.5% interest and are eligible for tax benefits under section 80C. The downside is that the interest amount is taxable on maturity, and the interest received on these bonds is not compounded over the years. Thus the benefit of compounding is lost which one can otherwise earn in bank deposits or other savings instruments.
Other investment options that can be given a thought are the National Savings Certificate (NSC) and the Public Provident Fund (PPF). The former is a six-year scheme with interest compounding every half-year, but the entire interest received on maturity is subject to tax, which drastically reduces its returns.
PPF, on the other hand has longer investment tenure — 15 years and the interest gets compounded only annually. However, since the maturity proceeds are absolutely tax-free, PPF gains an edge above most other products of its kind. Both NSC and PPF are eligible for tax deduction under section 80C.
As interest rates have begun to slide, returns on bank deposits have taken a backseat. While SBI currently offers 8.5% on its 5-year tax-saving fixed deposit, HDFC and ICICI currently offer 8% and 9% respectively on similar deposits and the interest is compounded quarterly. However, post-tax, the returns range from 5.96% to 6.77%, which makes them less attractive compared to PPF, NBNB and Jeevan Aastha.
