Most Common investment products in India, the risks and the confusion

associated with them

A perspective

Disclaimer

I have compiled this piece of information and tried to express my opinion and views on various investment
options for risk avoiding investors of India.

I have compiled this information from various other articles already written and expressed by various financial
experts and bloggers earlier in time and are freely available on the internet. I have compiled their views on
various investment schemes for financial risk avoiding investors of India.

The idea is to identify the best investment with good returns in the long run especially for risk averse persons.
The information in this article is simply copied from various other articles on various financial products such as
Mutual Funds, Public Provident, and Insurance.

I do not claim or take the credit of it to be written by me and to owned by me subsequently. These are expert’s
opinion on financial products such as MF, PPF and Insurance to be able to identify for you as to the best
investment option for risk avoiding investors.

The reason for writing a compilation in this way is being the shortage of time, and urgency of spreading
awareness, knowledge and education to generally risk avoiding and commonly novice investors on
India.

The Big Question?

Where should you put your money? Should you simply go by the herd mentality? Should you simply get in by
the most gung ho of articles on various safe investment options yet providing good returns in the long run?

No one can predict the market, not even the so called financial experts, market analysts and pundits. Capital
Market is a risky place, where no one knows how it will react the next and to which news in the market.
Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
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By that sense risk is everywhere to take in life and in investments, even if the investment or securities are back
by Sovereign Guarantee.

What must be your Strategy for a wonderful financial life?

All we can do is give our best in identifying the--

1. Best investment available based on our current financial situation,

2. Our future financial needs and goals,
3. Our risk taking capabilities, while,
4. Reducing the risk involved in the investment to the minimum,
5. Investing early, regularly, flexibly, continuously, and
6. With lot of discipline and good understanding various of investment products available in the market.

Let me discuss Mutual Fund, Public Provident Fund and Insurance in this article from the perspective of a risk
avoiding Indian investor, who hates losing money in any situation, and would rather wait patiently in the long
run and be happy in the present.

Mutual Funds

A study of 94 diversified equity schemes will tell you why keeping a tab on performance is important.

Data compiled by ETIG show of the 94 open-end diversified equity mutual fund schemes, for a 10-year SIP
period, the best performer gave an annual return of 29.45% while the worst performer gave 7.6% returns.
Less than 8%, the equity mutual fund has delivered lower returns than some long-term fixed deposits.

The study shows while it is important to focus on investing in the long-term, it is equally crucial to pick the right
product. Out of the 94 schemes analyzed, 12 returned less than 10% on a compounded basis over 10 years. This
is relevant to several investors today who have been sold equity mutual fund SIPs by the distributors
almost like a returns-as sure Guaranteed.

Many financial planners show excel sheets where they assure you equity SIPs will earn 12-15% and you
will reach your financial goals in life. If a scheme is underperforming its benchmark, it should raise a red
flag. For instance, there are equity schemes that have underperformed for two or three years in a row but have
caught up with the rest or even outperformed them over a five-year period.

This is true in the case of schemes whose fund managers shuffle their portfolios the moment they see
bubbles building up in sectors that are in vogue. If investors continue to believe in the fund managers'
conviction, they can continue to hold on to the investment, else switch out.

Let us now understand the various disadvantages associated with the Mutual Funds
Management Fees
Mutual fund companies have to pay salaries and marketing expenses and they always get paid FIRST before
the investors/owners get paid.
Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
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Do higher management fees correlate to higher returns and better performance? As it turns out, the
answer is No. In fact, many studies have been done that show higher fees generally correlate to lower
performance.

Wasted Cash
People occasionally want to withdraw their mutual funds, there must always be funds available - in cash - for
payouts. When money’s in cash, it’s not collecting interest. Since this comes from a portion of the investment
funds, it means it doesn’t collect any interest for you. That amount of cash is better off sitting in your bank
account. Although this provides investors with liquidity, it means that some of the fund's money is invested in
cash instead of assets, which tends to lower the investor's potential return.

Mutual Fund Charges

Mutual funds charge fees when you redeem your money. There are also “operating expense” fees. This is a
percentage of what it costs to run the fund. Let’s say you invested Rs. 100,000 and the operating fees are Rs.
2000. This means that you are effectively paying Rs. 2000 every year in operating charges.

Not tax-efficient
Mutual funds will process capital gain tax about once per year, which you will then be taxed on, even if you did
not take any capital gains that year. The end investor has little impact or say on how much a fund will decide to
spit out in capital gain distributions.
No Insurance
Mutual funds, although regulated by the government, are not insured against losses. The Government of India
only insures against certain losses at banks, credit unions, and savings and loans, not mutual funds.

Dilution
Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a
disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the
mutual fund itself would not double in value, because that security is only one small part of the fund's
holdings. By holding a large number of different investments, mutual funds tend to do neither exceptionally well
nor exceptionally poorly.

The Size
Some mutual funds are too big to find enough good investments. This is especially true of funds that focus on
small companies, given that there are strict rules about how much of a single company a fund may own.
If a mutual fund has Rs. 5 billion (500 crore) to invest and is only able to invest an average of Rs. 50 million (5
crore) in each, then it needs to find at least 100 such companies to invest in; as a result, the fund might be forced
to lower its standards when selecting companies to invest in.

Fund Performances – Last Updated on February 15, 2018

5 Years Annualized 10 Years Annualized

Fund Name Return in % Fund Name Return in %

ADITYA BSL LATIN AMERICA -9.86 ICICI PRUDENTIAL CORPORATE -14.19

FUND- GROWTH BOND FUND- GROWTH

KOTAK WORLD GOLD FUND -7.76 ICICI PRUDENTIAL CORPORATE -14.04

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
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 STANDARD PLAN- GROWTH BOND FUND B- GROWTH #(OC)

DSP BLACKROCK WORLD -7.36 DSP BLACKROCK WORLD GOLD -2.45

GOLD FUND- GROWTH FUND- GROWTH

HSBC BRAZIL FUND- -4.56 JM BASIC FUND- GROWTH 0.67

GROWTH

DSP BLACKROCK WORLD -4.05 UTI TOP 100 FUND- GROWTH 1.27
MINING FUND- GROWTH

Moving to specific categories, out of 65 large cap schemes, 30 schemes underperformed their
benchmark.

Large Cap funds – worst performances between certain periods

Flexi Cap funds – worst performances

Please note: ICICI Pru Value Discovery has only recently become a flexi cap fund, it was a mid cap fund previously.

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
 Mid Cap funds – worst performances

Small Cap funds – worst performances

Hybrid Equity funds – worst performances

Public Provident Fund

Public Provident Funds, also known as PPF is a fairly good scheme in terms of small savings. However, just like
anything has its own disadvantages, PPF too has a number of demerits that may not meet your specific needs. It
is rightly said that an advantage for some can be a disadvantage for many.

PPF (Public Provident Fund) is till date one of the most popular options. However, over time, the reduced
returns on Public Provident Fund (PPF) have made PPFs less attractive. Also, the low returns come at the
expense of liquidity and growth. Public Provident Fund (PPF) has a lock-in period of 15 years.

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
All of us are well aware of the facts and many benefits of PPF account in India. The benefits include tax
advantage under 80cc and 10(10D) etc., but are you aware of many limitations that your PPF account has. Let us
understand it below.

Limitations of PPF a account

Less or No Liquid Cash

Liquid Cash to be available anytime and every time is the need of every middle and lower income individual in
India. As per the PPF scheme, you need to keep investing till the 7 th year when you can start withdrawing the
money. Even after 7th year, only 50 per cent of the accumulated amount can be transferred. This long span of
investment stops many investors from pouring money in their PPF account. They can’t use their money till
7th year, though loan is available from the 3rd year on but only up to 25% of the accumulated amount till last
financial year.

Joint Accounts not allowed

One another disadvantage of PPF scheme is that joint account holders can’t apply together for the scheme. The
entire basis of joint account services offered by several banks fails with this restriction. However, joint account
is certainly permissible in case of opening an account with a minor. The PPF account holder can also nominate
someone for the account, which is an alternative for joint account.

No PPF Accounts for NRIs (Non Resident Indians)

PPF account is not permitted for Non Resident Indians. NRIs bring in a lot of foreign exchange to the domestic
economy and thus such schemes could have been a great source of investment. This is a big Disadvantages of
Public Provident Funds.

The maximum investment cap of Rs 1.5 lakh

Considering the devaluation of Rupee in the recent past, a lot of economist believe that the maximum limit of
PPF investment, i.e. Rs 1.5 lakh is a little on the lower side. This amount is not really a substantial amount in
terms of modern well earning Indian youth. If the investment would be less, so would be the returns.

Not an appealing choice for those already contributing to other provident funds
There are a lot of government as well as multinational employees who already contribute to GPF or other
provident funds, made compulsory by their employers. This section of population hardly feels any need to open
up a fresh PPF account altogether. This is the very big Disadvantages of Public Provident Funds.

Hindu Undivided Family and Trusts are not eligible to open PPF Account
While opening of PPF account was permissible for Trusts and Hindu Undivided Families (HUF), the facility is no
more available. This is one of the shortcomings of the scheme. These groups now have to look for alternative
modes of investment.

Taxes
If you have open a Public Provident Fund account and you have done partial withdrawal after three year of
account opening. In that case you will not get the Tax rebate. You will only get the tax rebate if you have done
withdrawal after 5 years of account opening date.

Cannot close PPF account before maturity

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
If you are running a Public Provident Fund account and you wish to close the account before the maturity. In
that situation you cannot close the Public Provident Fund account before the maturity. You are allowed to close
the account only in the case of death.

Full Withdrawal
The full withdrawal is only allowed after 58 years.

PPF Interest Rates have been changing frequently, especially in the recent time.
The history of PPF interest rate in last 30 years has been as follows:

PPF Interest Rate 1986 to 1999 – 12.0%

PPF Interest Rate Mar. 2000 to Feb. 2001 – 11.0%
PPF Interest Rate Mar. 2001 to Feb. 2002 – 9.5%
PPF Interest Rate Mar. 2002 to Feb. 2003 – 9.0%
PPF Interest Rate Mar. 2003 to Nov. 2011 – 8.0%
PPF Interest Rate Dec-2011 to Mar-2012 – 8.6%
PPF Interest Rate 2012-13 – 8.8%
PPF Interest Rate 2013-14 – 8.7%
PPF Interest Rate 2014-15 – 8.7%
PPF Interest Rate 2015-16 – 8.7%
PPF Interest Rate 2016-17 (1st April 2016 – 30th September 2016) – 8.1%
PPF Interest Rate 2016-17 (1st October 2016 – 31st March 2017) – 8.0%
PPF Interest Rate 2017-18 (1st April 2017 – 30th June 2017) – 7.9%
PPF Interest Rate 2017-18 (1st July 2017 – 31st Dec 2017) – 7.8%
PPF Interest Rate 2017-18 (Currently – 1st Jan 2018 onwards) – 7.6%

Quarterly revision of interest rates on PPF.

Earlier, the rates were considered for revision once every year. But with effect from 1st April 2016, the rates for
schemes like PPF, etc. are to be considered for revision every quarter.

Based on previous quarter’s yield on benchmark government securities (or bonds of corresponding maturities)
with a small mark-up (around 0.25%). So if yields go down, the PPF rates should go down few months after
that.
What could be the likely future of PPF?

Future is uncertain. Governments are under pressure. What if in the future PPF is taxed?

It almost happened this year for EPF before it was rolled back, but EEE status turning into EET is possible.

Another risk can be that PPF withdrawal might have certain riders like you can’t withdraw full amount on
maturity as the government is getting this large amount of money every year at relatively low cost.

The government will want to reduce the rate of withdrawal to keep money in its hands and prevent it from
going out at once.

Let us now discuss, the Term Insurance

What is Term insurance? It is a type of life insurance that provides coverage for a certain period of time or years.
If the insured dies over the policy tenure a death benefit (or sum assured) is paid out. No payout is made if the
Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
insured survives the tenure. The purpose of taking life insurance is to provide life cover to the policyholder and
financial security to his family.
Term plans provide pure life cover. This means there is no savings / profits component. They are basic plans
which make life insurance more affordable vis-à-vis other options. It is possible for the policyholder to opt for a
larger life cover at a lower premium when compared to a similar endowment plan.

Some of the key features that make term plans indispensable include
Larger life cover
Since term life insurance plans are more affordable it is possible for an individual to opt for a very high life cover
for the same premium as an endowment plan.

Riders
The policyholder can attach riders to the term plan, thereby enhancing the utility of the policy by opting critical
illness rider. This is in addition to the death benefit of an equal amount on death over the term of the policy.
There are other riders to choose from like – loss of employment cover, disability cover, waiver of premium
cover, among others.

Enhanced cover
Certain insurance companies offer the flexibility to enhance the life cover during critical stages of the
policyholder’s life. For instance, the policyholder may be permitted to enhance life cover by 50% at the time of
marriage and by 25% at the time of turning a parent. This makes it possible for him to start with a modest cover
and then enhance it as responsibilities increase as also the ability to pay higher premium.

Innovative features
While insurance companies have been quick to innovate in general, they have been most innovative with
regards to term plans. For instance, companies have been quick and proactive in cutting premium rates even
offering extra discounts to certain categories like non-smokers, for instance.

Drawbacks of Term Insurance

Due to medical advancement people generally are living beyond the average age. The average natural death rate
is North America is more than 75 years and for India it is more than 60 years.

 Premium increase steeply with age and as health deteriorates.

 Term insurance is provided for a period of 30 years maximum at once.
 Term insurance could get highly expensive in your 50s.
 It becomes very difficult to buy term insurance if you are over 60 years
 Term insurance will not serve the purpose if you wish to save money for a specific need such as
education of child, marriage, old age provision like retirement needs etc.
 No surrender values or loans are available under term policies. It is simply innocent to expect any return
from term insurance as long as you are alive.
 The major disadvantage of term insurance is that there is no wealth creation or maturity benefits
whatsoever.

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
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 Endowment Policy

An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its
maturity') or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies
also pay out in the case of critical illness.

Endowment plans offer the dual benefit of long-term investment and insurance. Apart from paying the sum
assured (or accumulated amount minus outstanding premiums, whichever is higher) to the beneficiary in case
of the policyholder’s demise, endowment plans also pay a lump sum maturity amount (adjusted after
considering company performance and premium defaults) if the policyholder survives the policy tenure. This is
a key advantage of endowment policies.

Safety in endowment policy

Even though the returns on endowment plans may be lower, they are risk-free in terms of the sum assured.

Disciplined savings
Policyholders need to set aside a pre-determined amount towards the premium payment at a stipulated time
interval, thus, encouraging a disciplined approach to saving.

Assured bonuses
Endowment plans declare an annual bonus, typically paid out as a specific percentage of the sum assured. In
case of the policyholder’s survival, additional bonuses accrued during the policy term are paid in addition to the
sum assured.

Compounding returns
A key advantage of endowment plans is that they fetch returns on a compounding basis during the policy term.

Loan facility
Policyholders can take a loan against an endowment policy as and when needed, and this is usually without the
need to secure the loan against collateral.

High liquidity
Endowment policies are liquid in nature.

Premium flexibility
Another important advantage of endowment plans is that you can pay your premium over a short period and
enjoy the policy benefits over a long term. In case premium payments stop after certain minimum years'
premiums have been paid, a free paid-up policy for a lower sum assured can be secured - subject to certain
conditions.

Additional benefits/riders
Insurance companies offer additional benefits to policyholders, such as marriage/education endowment plans
and double endowment plans. An endowment plan also lets policyholders add additional riders for major
surgical assistance, critical illnesses etc., by paying a marginal premium.

Suitability of endowment policies

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
People with a regular income stream (to pay premiums regularly) and those who require a lump sum amount
after a certain period may consider an endowment plan.

Also, those with a low risk appetite, who wish to include risk-free assured investments in their portfolio, and
those who do not mind trading additional risks for lesser returns could opt for endowment plans.

Duration
Since endowment plans are long-term plans in nature, longer the policy period, better the overall benefits.
Endowment plans work best if they are taken with a long-term perspective, as this encourages regular savings
for an extended period. Those with irregular income may opt for flexi pay or single pay plans instead of regular
pay endowment plans.
Important considerations before purchasing an endowment policy
Insured-related (Policyholder) factors: Current life stage; age; individual needs; income; risk appetite; savings,
investment, and long-term financial objectives.

Insurer-related (Company) factors: Premium rates, customer service track record, bonus payment track record,
bonus rates (translate into a simple ROI to measure the relative worth of the plan), claim settlement ratio,
reputation, and financial standing.

It is prudent to pick an endowment plan that is simple and easy to comprehend. Policies with complex features
and benefits should be avoided. It is advisable to read the insurance document very carefully before committing
to avoid missing any catch in the fine print.

PPF VS Endowment Policy Case Study

PPF Endowment
In PPF whatever is saved will be paid with interest In endowment the sum assured with bonuses are paid
on maturity or upon death. upon maturity or on death.
Saving in PPF for a long term generates wealth for an Insurance plan gives protection as well as wealth
individual at certain rate of interest creation by regular savings over the long term
Only one PPF account is allowed per person A person can have multiple insurance policy
PPF cannot be used as a collateral LIC endowment policy can be used as a collateral
It provides wealth creation in the long run and does Insurance provides immediate financial security to the
not provide immediate financial cover beneficiaries / nominees in case of death of the insured.

Case study
A person, aged 30 with good taxable income, wants to create a corpus for use after 15 years for the wedding of
his daughter who is now 5 years old. He has no insurance. He plans to deposit Rs. 1,00,000 every year for 15
years in PPF expecting to get Rs 31,17,278 at the end of 15 years and this would be tax free.

If he takes an endowment policy for 15 years with Accident Benefit and pays about Rs 1,00,000 per year he can
get an insurance cover of approximately Rs 15,00,000 with bonus taking LIC's current endowment plan as an
example. Assuming a bonus rate of 38 per 1000, at end of 15 years he will get tax-free maturity proceeds of
about Rs. 23,55,000

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
----------------------------------------------------------------------------------------------------------------------------------------------
Now, if this young man dies just after 3 years, let us say while driving his car, from PPF the family will get Rs
3,55,294 only. From the life insurance policy, the family will get basic sum assured of Rs. 15,00,000 plus bonus
of Rs. 1,71,000 for three years plus accident benefit of Rs 15,00,000 totaling Rs 31,71,000.

Even if the death is not due to an accident and the accident benefit is not available, the family would still get Rs
16,71,000 tax free. It is to be noted that in case of life insurance an estate (here the provision for marriage) was
created the moment he took a policy and he pays for the estate over 15 years or as long as he lives.

Conclusion

If you want a policy that offers more than just life cover, an Endowment Plan is your best bet.

The triple benefits of long-term wealth creation, insurance coverage, and regular goal-based savings make these
plans the right choice for people belonging to any age group, irrespective of their saving capabilities.

Even though endowment plans may offer lower returns, they are much safer and guaranteed that one’s
investment and insurance needs are well taken care of under a single plan.

An endowment plan is a savior during a financial crisis - an excellent channel to assure financial support and
security to one’s family at present and in the future.
The returns may be lower, but they are mostly risk free in case of guaranteed sum assured.

Tax benefits, subject to certain conditions, are also available on these returns.

This explains why endowment plans are preferred by risk-averse investors as besides providing cover to an
individual's life in case of an eventuality;

They also give the maturity amount to the policyholder if he survives the policy.

Mukesh Joshi
Chief Insurance Advisor, Financial Planner & Wealth Manager
LIC Agency Code- 4612921
Branch Office- Dr. DN Road, Fort, Mumbai- 400001
[email protected]
976-857-1777 / 885-036-7364
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