Guaranteed returns: Check Long Term Needs
There has been a flood of guaranteed return options from insurance companies but check out whether it meets your long term needs. Wealth creation needs more money and period through fixed return products.
You just need one year of weakness in equity markets for investors to rush for guaranteed returns. Forget the investor, even product manufacturers (your mutual funds, insurance companies and the like) are rushing in with structured products which offer the comfort of fixed returns. While downtrend is the best time to accumulate in an equity market, investors invariably end up looking at debt during the downtrend and vice-versa.
Now, take the case of two leading insurance companies which have come up with guaranteed returns on their insurance schemes. While LIC has launched Jeevan Aastha, a fixed return product, ICICI Prudential has launched a fund, RGF, with the buy-back option of first year premium on four of its schemes. In the case LIC, the product is one-time premium and comes with tenure of 5-10 years. The product offers guaranteed return and loyalty return and the effective yield is projected to be around 9%. Since the product also comes under tax saving option under Section 80C, there has been an unusual rush among investors for the product. The product is being pitted against fixed deposit which is far less tax efficient because of tax on interest income. Interestingly, the pamphlets of insurance advisors project the superior benefits of the product vis-a-vis FDs and hence, investors have been made to believe that the insurance plan offers superlative returns. In fact, some of the advisors on the blog claim an annualised returns of 17% for the scheme!
Countering LIC’s plan has been ICICI with its latest fund, RGF (return guaranteed fund). This fund, which is more of a feature for four of its insurance schemes, offers a guaranteed return of slightly over 8%. The company promises to buy-back the first year premium at an NAV of 15 after five years from the date of investment. If the NAV happens to be higher than Rs 15 at the end of five years, the actual NAV would be applicable for the investor.
If an investor signs up for an insurance policy for a term of five years, he has the option of choosing for RGF for first year premium and can opt for change of fund for the remaining four years of premium paying period. The investor, however, need not worry about the choice of fund immediately and can take the call on investment option at a later date. The basic idea behind the fund is assuring the investor of returns in a year where equity has proved to be volatile. With the coming year too being expected to be volatile, the investor may feel comfortable with guaranteed return products.
Suitability: the assured return products are suitable for risk-averse investors and for those who are looking at the prospect of protecting returns. Hence, investors who are looking at parking large sums in the first year can opt for such products. On the other hand, the product may not serve the purpose for young investors as they need to look at options which have the potential of creating wealth. With guaranteed returns, either it would take longer time or investors will have to park larger sums for building wealth. More importantly, equity is closer to its three year bottom and chances of equity providing single digit returns from current level is limited. For instance, even at current market levels, five year returns from equity outperform debt products. Take all of these options keeping in mind the risk-reward ratio which is loaded in favour of equity at present.
