Yogya Capital - Sahi Nivesh - Part 2- Guaranteed Return Products
Sahi Nivesh series is an educational series by Yogya Capital to educate about finance & avoid investing in unfit products for individual. So, part 2 of the series deals with guaranteed return product
Estimated time to read - 4 minutes
Brief -
The tax planning season is on as people find ways to invest their money of Rs 150,000 to get a deduction under section 80C of Income Tax. Also, this becomes an active time for multiple advisors to sell multiple products to invest without considering their suitability for the investor. Let’s understand how to review these products.
The Product details you are provided -
💥 Tax-Free IRR 7.07%💥
Invest 2 lacs for 10 years
Get 40,074/- for 45 years (1st year onwards)
Get Maturity Benefit @ 1.86 crore at 85th year
You paid 2 lacs
You get 2.04 crore
Tax Benefit us 80c
Tax Free income under section 10 (10d)
Increasing Death Benefit
Note: Calculation for 40 years old Male
How will the agent pitch you the above product?
Sir/ Ma’am, this product is from ABC Insurance company, which has multiple years of existence. This product allows you to invest 2 lakh every year only for 10 years which can be claimed under Section 80C & also gives you 40,074 from the 11th year for 45 years which will also be tax-free for you.
So you get benefits by saving tax today & also receive income tax-free. So, it looks suitable for you, so go for it.
So firstly how to decode the above product returns?
Step 1 - Simply, go to Excel & type in the date of payment & receipt of money & the amount to be paid or received.
Step 2 - Calculate XIRR of the above amount, by using XIRR formula in excel. The amount is -0.37%. Yes minus 0.37% return for the money you invested.
How come the returns are in the negative territory?
The agent told you IRR, not XIRR. So what’s the difference between the two?
IRR (7%)- considers inflow & outflow without considering the transaction date.
XIRR (-0.37%)- calculated based on the timing of the inflow & outflow of money.
The agent who sold you the policy receives % of the premium - It is around
For the 1st year - 30-50% for &
2nd year onwards - 3-5% until the client pays the premium.
The insurance company profits - hedges the risk by investing in longer-dated securities & the rest is profit for the insurance company.
Conclusion -
Sometimes, things are made so simple that we forget everything & don’t even think about revisiting the proposed investment at our convenience. (Here you sold based on investing 20 lakhs in total & receiving back 2 crores.) But the devil lies in the details when you do simple math you won’t want to invest.
So, once you hear such a mouth-watering pitch of high returns wait & think -
Why the person is asking you to invest when he can earn such high returns?
Ask the seller how much he has invested.
Don’t get sold on 1st day you can pay till 31 March 2024. Think at your convenience & get back to him in case you find it appropriate.
Also, we would be happy to answer queries you might have related to personal finance. We plan to start the reader’s query section soon.
So here’s the end of part 2 of Sahi Nivesh from Yogya Capital. Do share & subscribe to the blog.