I thought to write this post after talking with my friend who recently enrolled in the “HDFC Sanchay Par Advantage” plan, when he briefed me about the policy it sounded great and after working it on an excel sheet its returns were not even good than a fixed deposit.
First, we should not subscribe for the products which club Insurance and Investments however fancy it looks for you. Always treat your insurance as an “expense” not as an investment plan, for the investment we’ve to follow a different approach. Here, this post is to show why we should not mingle both in a sole product.
Let me explain about these policies in short which clubs’ insurance and investments in the same product and you should not buy them if it sounds like any of the below,
- ULIP – Unit Linked Insurance Plan is an insurance that offers both investments for long-term purposes as well as life cover for your family in case of your demise. The premium paid will be contributed for life-cover and remaining for the investment of your choice (you can choose equity, debt, or both as per your appetite).
- Endowment Plans – It is a long-term investment product that offers a lump sum at the end of your policy tenure and part of your premium includes life insurance in it which will be handed over to your beneficiary in an unfortunate situation.
- Money-back Policies – It is an endowment policy with liquidity. In an endowment, the investor/insurer gets the sum assured at the completion of its maturity period whereas in money-back the investor/insurer gets a percentage of the sum assured at regular intervals during the policy period.
HDFC Sanchay Par Advantage
What my friend told me was; we need to invest two lakhs/year for the next 6 years as a premium for this product and we will receive a fixed amount of INR 50,000 every year for the next 30 years from the first year of your investment. Sounds Great right! he didn’t stop there and at the end of the 30th year we will get the fifty thousand along with all our premium paid (2 Lakhs * 6 years = 12 Lakhs ).
Now, it sounds even better right , fifty thousand rupees per year for 30 years and twelve lakhs’ rupees at the end of its maturity which is a total of twenty-seven lakhs for twelve lakhs of our amount. Along with this, there is a life cover of twenty-five lakhs as a death benefit to the family for the entire tenure.
After hearing about this I thought this is a good plan to buy. This is the common mistake all of us have done after hearing about an attractive product like this we blindly go and subscribe to it without even working on paper. If you work on paper, you won’t make most of the financial mistakes in life. Let me work on an excel sheet to get a clear picture of it, I mean the instrument “returns percentage”.
Decoding in an “Excel”
Though when we say it in words the “HDFC Sanchay Par Advantage” plan sounds great but it’s not when we tabulate it in an excel sheet .
Screenshot for first six years alone
Here, column “B” yellow highlighted one is the premium paid by us/investor and column “C” is for the amount received from the AMC, in our instance we’ll be receiving 50,000 INR every year from HDFC AMC.
Column “D” is nothing but total outflow and inflow of our money for a year. “-Ve” sign indicates the amount which we spent from our pocket, and this helps to find the interest rate. For e.g.: Consider row “02”, we paid a premium of 2,00,000, we need to consider this as “-2,00,000” because we spent this from our end and we received 50,000 for the year 2021 which will be considered as “+50,000” ( D2 is -2,00,000+50,000 = -1,50,000)
Last column “E” for GST, for the first year it will be 4.5% and for the remaining five years it will be 2.5%
Screenshot for 30 years (till maturity)
Let’s look at column “B”, after 6 years we no need to pay any premiums hence for the remaining years we can mention them as 0, so as for the column “E” for GST.
Column “C”, we’ll be receiving 50,000 INR every year till maturity as per the plan.
Column “D”, after the sixth year as we are not paying any premiums there are no outflows, hence we are simply mentioning the 50,000 INR for the rest of the year and look at the final year it is 12,50,000 INR because as per the plan we will be receiving all our premiums back at the maturity period i.e. 50,000+12,00,000.
Now, the blue highlighted box “5.24%” which is the interest rate for our invested money for 30 years which means our money twelve lakhs was growing at a rate of 5.24% every year which helps us withdraw 50,000 every year and 12,50,000 at maturity. (The formula to find interest rate is “=IRR(D2:D31)”)
Hope you can finalize after seeing the return percentage of the product whether to invest or not. 5.24% return is less than a fixed deposit return of 5.5%. To ease our calculation, I haven’t added the GST amounts, or else the returns will be even worse. In addition to that, the amounts received will be taxed as per your tax slab.
Not only for this plan, but we can also use this to find interest rates for whatever investments we are going to make.
Time Value of Money
Compounding is the impact of the time value of money . Most people don’t know the time value of their money and these AMCs are making a fortune with our money.
Let’s see the below screenshot as an example – with PPF (Public provident Fund) which provides 7.1% tax-free interest at the end of its tenure. (During real-time we need to invest a minimum of 500 rupees every year to keep our PPF account active and its maturity is 15 years, after 15 years we can extend its maturity to 5 years every time) .
At 5.24% we got a total of 27 lakhs. Hereby doing the same 2 lakhs per year investment for the first 6 years, at 7.1% we’ll be receiving 79 lakhs at the end of the 30th year. I hope now we can understand the time value of money.
Screenshot of investment at PPF interest rate of 7.1%
Just to see how interest rates play a role in compounding. Now, let’s have an example with the equity market. In the Indian market context, equity has given a return of more than 14% for a period over 30 years and above.
For this instance, we’ll assume 12% as post-tax return percentage, and let’s assume we are withdrawing 50,000 every year and 12,50,000 at the final year.
Even after 27 lakhs of withdrawal, we are left out with an additional 1 crore and 28 lakhs. This is how compounding works when we give enough time.
Screenshot of investment for Equity market – interest rate @12% post-tax
More reasons for not to invest
With the above interest rate examples and time value of money concept, you could conclude whether “HDFC Sanchay Par Advantage” is a worthwhile investment choice or not. If you still think it a good, then I have gotten a few more points to add-on to this to prove why we should not club investment and insurance.
- If you’re arguing with the point, I’m okay with 5.24% interest as it also produces life insurance of 25 lakhs in case of insurer demise. My friend’s age is 26 and the term insurance for 1 crore will be around 10K/year for his age and this is constant for all the upcoming years’ premiums. Instead of buying this product he can invest in equity and withdraw from it 10K every year for term insurance (not needed as you can add nominee for your equity too) and, he will have enough corpus from equity.
- Illiquidity of the product. – “Money: Power at its most liquid “ Whatever investment you make in life if it is illiquid its worst don’t care even if it is making massive returns for you at the end. If you’re in need of money due to an emergency at that time if you’re not able to liquidate the product, then why do we invest in it. The best example is “Indian Real-estate”. Though this product comes with the surrender Benefit, which means you can leave it whenever you’re not interested in it. But hey, it’s not easy as you think. You can surrender only after two years of your investment is completed and that too you’ll get only 50% of your investment and it’s not like stocks you can sell and get it in a day, it may take some time to get into your pocket.
- Tax Avoidance – If you’re thinking you can use it to avoid tax after buying this product, “ Making an investment for tax avoidance is the biggest mistake you’re making in personal finance”. Have a mindset like you’re rich already and behave like it instead of making these investment mistakes to avoid taxation. However, you are going to pay tax for 50,000 every year and 12,50,000 at the end for buying this product.
I hope, this article may help you to find a good and bad investment in your life. Decide wisely.