One of my clients Mr. Ramesh Savasere questioned “Srikanth Sir, I got a SMS today which read: Invest Rs 100 per day for 25 years and get Rs 25 lakhs at maturity…it looks very good to me…shall I go for it? I am looking at this investment as a retirement option. What do you suggest?”
Dear Ramesh Savasere,
Rs 25 lakhs looks good to hear. But, will it sound good in 2038 i.e, 25 years hence?
Your Rs 25 lakhs at just an inflation of 8% would be worth only Rs 3,65,000 of today’s value. So, is this money enough for your retirement? Let us first look at how much you are investing. Rs.100 per day works to Rs 3000 per month, Rs 36,000 per year and Rs 9,00,000 for 25 years. So, out of Rs.25 lakhs that you will receive, please note that Rs 9,00,000 is your money. This means your investment is earning you a shockingly paltry 4.5% returns! Yes, the same as your savings bank return. And how much are you covered? A princely Rs.10 lakhs. So, your family will get between Rs.10 lakhs to Rs.25 lakhs as insurance in case of your death. Now, since you are 26 years, for the same Rs.10 lakhs, if you take a pure term plan, your premium would be only Rs 3010 in LIC (in Kotak it is far lesser at Rs.1971 only). Even if you take the term plan in LIC, you are covered for Rs.10 lakhs, saving Rs.33000 per annum. If you invest the savings of Rs. 33,000 in PPF/long term bank FD, your corpus would be Rs.25 lakhs. If you invest the same Rs. 33,000 in mutual funds through SIPs, even assuming a very conservative return of 12%, you would still have a huge kitty of Rs. 46,81,000 and at a reasonable return of 15%, you would have a corpus of Rs 75 lakhs. And, also this investment would be liquid and you can use it anytime you want. So, let me know if you now think that Rs.25 lakhs is meagre.
Insurance is not an investment vehicle:
Insurance is an expense, not an investment. Do not use insurance as an avenue for investment – you are in the wrong lane. An insurance policy will not and is not meant to create wealth. Life insurance enables you to protect your family from financial hardships in case of an uncertain death. Treat it that way. Insurance companies and its agents are doing well mainly because of the ignorance of the policy buyers and holders. No wonder so many foreign companies wish to enter India. Insurance agents have led the Indian public to believe that “you should get something back when you buy insurance” for years.
- Avoid pension plans and endowment plans from insurance companies. A basic term insurance is the best insurance policy.
- For pension – the trick is to create as big a corpus before retirement. Once you have created a corpus, you can create pension income by investing in immediate annuity. It is a myth that only insurance companies can create pension. It will be better if you start investing in diversified equity funds via SIP to create wealth. PPF can also play a small part initially and a greater part in the later years.
- You can also get free life insurance cover (no mortality and admin charges) by investing in mutual funds of Birla, Reliance, BOI Axa & Kotak. Birla Century SIP gives you a cover which will be equivalent to your market value of the units you have or 100 times your monthly SIP, whichever is less.
- Under the Century SIP option, if an investor makes monthly SIP instalments, the insurance cover for the first year will be 10 times the SIP amount and in the second year it will go up to 50 times and from the third year onwards upto 100 times, subject to a minimum SIP instalment of Rs 1000 and maximum cover of Rs 20 lakh per investor. Among the Birla Funds, you can consider Birla Sunlife Frontline Equity Fund, Birla Sunlife Dividend Yield Fund and Birla Sunlife Equity Fund. BOI Axa also offers insurance similar to the terms that Birla is offering. More details here.
- Kotak Mutual Fund also offers life insurance cover wherein in the case of death of a parent, the fund will invest the balance SIPs in the name of the child. Among Kotak funds, you can consider the Kotak K50 Fund.
- Reliance Mutual Funds is also offering free life insurance cover through SIP Insure. In Reliance SIP Insure, Reliance will pay the unpaid instalments of the future SIPs in the event of the death of the investor during the SIP tenure. Among Reliance funds, you can consider Reliance Growth Fund and Reliance Equity Opportunities Fund.
- In Birla, the insurance coverage will gradually Increase but in Reliance and Kotak, the insurance coverage will gradually decrease. Ideally, one can take a SIP in 1 Birla and 1 Reliance/Kotak fund, this way your insurance coverage will be more or less the same throughout.