Returns, returns, returns! Seldom do customers look at other aspects of an investment product. But, returns alone cannot be used to judge an investment.In recent times, capital guaranteed insurance products have become very popular. Investors are choosing these regular fixed return products due to the guaranteed returns on the sum assured. Some investors asked for my opinion, and were very disappointed when they learned that the product has been giving only 4.5-5 percent returns over long-term periods and not the 7-8 percent that they had actually been promised. I even had an investor trying to convince me that this was a great product to invest, simply because there was a capital guarantee and it was from a prominent insurance company and was being sold by one of the biggest banks in India. In fact, the investor also mentioned that there are some great life insurance benefits! Incidentally, the investor is 65 years old and, being an ultra HNI, does not need insurance.
Ask before you invest
The first question to ask yourself while investing is about how the product works and if you need the features the product provides. Second, what is the cost associated with the investment? Third, how are the returns generated. Regarding returns, how is it possible for an insurance company to give a fixed return of 8 percent when a nationalised bank fixed deposit gives only 5.5-6 percent annually? Either the investment must have higher risks, or something may not right with the return calculation.
Obviously, most customers find it difficult to work out actual returns. It is not very difficult and this can be done on an Excel spreadsheet using the XIRR function. There are many online tutorials available on XIRR calculation. Returns are always dependent on cash flows and, hence, in any insurance product, the sum assured really doesn’t matter, if you invest in it for returns and not for the insurance cover. Do not blindly go by the insurance illustrations, as they do not include GST as well as premium loading. While doing calculations, always consider post-tax returns.