Yesterday (27 Feb 2017) Yogita Khatri did an article in ET_Wealth about Endowment plans being inefficient vehicles for investing for the long run. Nice article with a lot of research and lots of numbers – no I did not go through the numbers, but the gist was “you are better off taking a term plan and putting money in a combination of ppf, elss” – obviously from a retail investor’s point of view. I am assuming that the target audience is one where the net worth is less than Rs. 1 crore and taxable income of say Rs. 15L. So I will also not talk about the wealthier clientele for whom the answers can be very different, and I can easily see a role for a classic endowment plan with assured additions.

One also has to remember that a good life insurance company has to have amazingly good investment skills in a complicated investment world. The interest rates in South Korea, Taiwan etc. have seen a fall from 9% to say 2% and even in India we have seen the 10 year Gsec come down from 12% to 6.8% with a dovish outlook. So when the Gsec was 12%, my offer of 5% would have looked like a loot – but over 16 years the interest rates have come down AND I HAVE TO INVEST the investor’s money for 14 more years. Get the drift? So it is not easy.

The classic endowment product is the ONLY product where the risk is on the company issuing the policy. So while it is easy to flash the ELSS performance – remember the risk is on YOU, not on the managing mutual fund. The public provident fund DOES NOT promise you a flat return – in fact when the return rate changes it changes for the whole accumulation. So if you did invest in PPF when the interest rate was 12%, you will now be forced to smile with a 8% return – again with a downward bias. So if you had accumulated 30L in PPF, now the interest rate of 8% is applicable on the whole corpus. That should be understood. When interest rates change slowly we forget concepts like Real Return.

“No other investment product offers guarantee for a long tenure of up to 20-25 years, in addition to the risk cover,” says Manik Nangia, Marketing Director and Chief Digital Officer, Max Life Insurance. I completely agree with Manik and Manik is one of the saner voices in the industry. The Unit linked endowment plan can be tweaked to give good returns for people with good investment skills – it is NOT a fill it, fit it, forget it kind of a product unlike the traditional plan.

When journalists say risk-averse investors, I guess they mean risk NOT UNDERSTANDING investors and not risk averse. Warren Buffett is a risk averse investor. So is Vallabh Bhansali and so is Ramdeo Aggarwal. They are risk understanding, risk averse, investors. Risk averse and risk not understanding are the same for our media.

When an article says ‘Nps is a good option’ I guess it has to be understood with the limited scope of this article – NPS is better than a classic endowment plan. Nothing more. Nothing less. What scares me in NPS is not the structure, but the fund manager skills, and the fund manager unlimited freedom. When the Gsec yield moves to say 5% and say it stays there for a year – I would like to see the fund management skill of playing with tenure (at least for a part of the portfolio) to brace oneself for the upward journey. The whipsawing that one WILL surely see in the debt market yields will cut cruelly on the small saver/investor and the media will scream about how the government should step in and protect the “small investor”. Ha, 2019, we are going to see some blood.

I have not seen the calculations, but I am sure that Yogita and Babar would have got it whetted by the policy issuing companies. I would like to see the yields on the traditional plans of the private sector insurance company – I mean what the client paid and what he got as a maturity value. 15 year policies should have come up for redemption – so I want to see the returns of Hdfc and Icici classic endowment plan returns.

When Journos do articles about ULIP they talk about returns taken from Morningstar. Honestly that defeats the purpose. One has to see what the policy holder got AFTER management fee, admin charges, risk charges, taxes, etc. – a person paying Rs. 5000 annual premium is not the same as the guy paying Rs. 500,000 annual premium. The absolute charges hurt the small guy, unlike a mutual fund where the return remains the same immaterial of the amount invested.

The media has to take a part of the blame why more traditional plans are sold. They have demonised the ULIP so badly that NO financial planner can suggest a ulip EVEN if he thinks it is a good fit for the client. So all that the insurance salesman has to say is “sir this is NOT ulip” – and the commission structure of a huge upfront and a small commission on future premia make it easier to sell it by offering some incentive. All rewards – commission, MDRT, COT, TOT – are all based on the first premium.

Pattu, Suresh Sadagopan are all right in saying that there are better options that are available. Sure. However, I can fit the traditional classic endowment plan at two levels of the investing population. One is the person wishing to have just one instrument for saving/investing / tax saving and a person without the access to a good adviser. This is your clerk, peon, driver, house maid – most people worried just about return of capital rather than return on capital. Some of these people around my life invest in mutual funds UNDER MY SUPERVISION. They have been weaned away from bank RD. However, if they do not know where to turn to for advice and they have no clue about anything else, the classic endowment is not a bad product.

At the higher end of the spectrum I do like the classic endowment for people who understand that a portion of your debt portfolio should be in products where the issuer keeps the risk with himself. All of us know that risk transfer has to happen ONLY at a premium. Risk transfer cannot be free Yogita. That’s life.

PS: I know all the people mentioned in the article, and some like  for almost 2 decades.

 

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  1. Argument is true.

    Seen from a different perspective, LIC endowment plan yield is 4-5% and our interest rates were never below that. Recently only(in my limited experience of 20 years) the rates are coming down to about 7-8%.

    Thus till now LIC was surviving/progressing on lack of analytical ability of the users.

    However, it need not change fast. Last year my CA colleague joined for a plan of 1 lakh premium per year giving some return after 10years, with a life cover of 10 lakhs. Not only that, he made few of my other colleagues join in the same plan.

  2. Subra,

    How are you saying that the interest for PPF is on the corpus,actually the interest is credited at the end of each financial year based on the prevailing interest rate offered for PPF accounts

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