Have you the advertisement of Bajaj Shield Plus? It shows people in a bus making fun of a person investing his money in fixed deposits and then telling him advantages for Bajaj Shield above fixed deposits:
- It gives a guaranteed return of 170%
- It gives insurance
- It gives tax benefit
- And so it’s better than any fixed deposit
I just wonder who’s laughing on whom!
Now let’s do some myth busting
Tax benefit: You can get tax benefit in fixed deposits too and it has a locking period of 5 years. With present rate of 7.25% – 8% you would get a post tax return of 5.1% – 5.6% (in highest tax bracket) to 6.5% – 7.2% (10% tax bracket) depending on the tax slab you fall.
Insurance benefit: It has two multipliers for insurance. You can either get insurance of 1.1 times your premium or 5 times your premium. 1.1 times insurance cannot be considered an insurance cover and it’s totally an investment product. For 5 times insurance – I need not repeat myself that term insurance is far cheaper and 5X would hardly cover total life risk for anyone. Check out the term insurance rates here.
Guaranteed return of 170%: And this is the major selling point for this plan. But probably they forgot to convey (in the advertisement) that it was in 10 years. So it’s essentially is an annualized return of 5.45% (not great by any comparison).
But wait there is more to it. You forgot to account for the expenses that you would incur in the policy.With policy allocation charge (1%), fund management charge (1.35%) and mortality charge, the annualized return comes in the range of 3.5%.
So your guaranteed return on your total policy premium has effectively reduced to 141% from 170%.
Your investment of Rs 50,000 in Bajaj Shield Plus would guarantee you Rs 70,000 (141%) at the end of ten years and not Rs 85,000 (170%) that you initially thought.
But this is the minimum returns guaranteed by Bajaj Allianz and with equity funds performing well the returns could be much more.
So the question now is if Shield plus is better than Fixed deposits?
If you do Fixed deposit today for Rs 50,000 @ 8% interest rate in HDFC Bank you would end up anywhere between Rs. 86,220 to Rs. 107,946 , depending on the tax bracket you belong to. This is around 23% to 54% more than the guaranteed return of Rs 70,000 in Bajaj Shield Plus. But then for Shield Plus with 0-50% allocation to Equity the return would hopefully be more than guaranteed sum. But how much is anyones guess!
Is there a better way to outperform the above fixed deposit returns?
You want to lock your money for 10 years. Generally for 10 years you can expect a much better return if you invest in equities. An expectation of 12% – 15% return per year would be a reasonable estimate. And then it would also be tax free (as per the present tax structure). But having said that it’s for aggressive investors and may not suit the conservative types.
Is there a plan for Conservative Investors then?
If you want to stay away from equities completely then you have two options.
Invest in PPF (Public Provident Fund) – this has interest rate of 8% and is tax free and also eligible for tax saving 80C investment. The caveat the max per year you can invest is Rs 70,000 only.
EPF (Employee Provident Fund) – This has going interest rate of 8.5% but can only be availed by salaried employees. So you can increase your contribution and get a risk free return of 8.5%.
Both PPF & EPF are guaranteed by Indian Government and so is risk free. The rates for both are determined by the government and notified every year in advance. Since this is politically sensitive; the rates are among the best you can get for risk free debt instruments.
I am moderate risk taker; can you suggest something for me?
Yes, you can have a mix of debt & equity. This is how the math would work for you. I assume that you want guaranteed returns at par with Bajaj shield plus. So for investment of Rs 50,000 you want at least Rs 70,000 at the end of ten years.
Invest in PPF
For getting Rs. 70,000 at the end of 10 years @ 8% per annum you need to invest Rs 32,500 today. So after investment in PPF you are left with Rs. 17,500.
Invest the remaining amount in ETF / Diversified Mutual Fund:
Now you can invest the Rs 17,500 in any Mutual Fund and can expect an annual return in the range of 12 – 15% per annum for 10 years.
So taking both PPF + MF returns you would get returns anywhere in the range of 9.5% to 11% per annum.
For an investment of Rs 50,000 here is the return you can expect from different alternatives above:
|Instrument||Guaranteed Return||Extra Return|
|Bajaj Shield Plus||70,000||0-50% in equities|
|Fixed Deposit||86,220 – 107,946||–|
|PPF + Equities||70,000||35 – 50% in equities|
Higher equities exposure has greater chances of better returns. So with my PPF + Equities strategy I expect to outperform Bajaj Shield Plus with a good margin.
Depending on your risk profile and your understanding you can decide what suits you best. But if I were to choose I would choose PPF + Equities for someone who wanted to invest in Bajaj Shield Plus but after reading this has changed his mind!
And by not opting for Bajaj Shield Plus probably its you who would have the last laugh!