At 45, if a customer purchases a plan of Rs 50 lakh with a deferment period of 10 years, he can get an annuity rate of 12 percent with an annuity amount of Rs 6 lakh each year

This is what the ad for Hdfc annuity plan says. Which means if you are 45 years of age, and if you invest Rs. 50L, Hdfc will buy 30 year G-sec and get say 8% return for 30 years. Why 30 years? because that is the maximum period for which you can get a G-Sec. You cannot get a 40 year G-sec. So if you need to invest for 40 years, you run an interest rate risk. That is not necessary here.

The average age in India is 72 as of now. In cities like Mumbai it is even lesser – it is just 59 for men and about 62 for women. So for a 45 year old the money is invested for 30 years – till his age of 75. On an average he/she will die at 72. So Hdfc invests Rs. 50,00,000 in G-sec and gets about Rs. 4L as interest every year. Do remember that at 8% money should double in 9 years. So at this clients age of 54, Hdfc will have about Rs. 1 crore. At age 55 when the pension should start, the pension is Rs. 600,000 payable per annum.

Hdfc has a corpus of 1 crore, earning say 8% – and they need to pay Rs. 600,000. Leaving a cool Rs. 200,000 with them. Not bad considering that if they sell say 100,000 such plans. That leaves them with Rs. 2000 crores of profit. Oops.

Let us look at the downside. If interest rates go down..well the bond prices will go up, thus the upside will belong to the holder of the bonds. That is Hdfc.

What happens if interest rates go up? Well if they have some interest income which is being reinvested it will be reinvested at a higher amount, right?

What happens if a few people live beyond 72? Well, what about those people who die at 74? the principal stays with Hdfc right? That is not bad uh?

What have I missed out?

the 2% commission payable to the agent at the start of the policy.

policy servicing administrative costs

brokerage – remember it is a one time cost – and a negligible amount that too.

incidental taxation…of any kind.

Should you buy this? Personally I am not buying.

How can you benefit by this product? Buy shares of Hdfc standard life.

Yes I have been saying “its too expensive”. It is, but they have a platform to launch such lovely products, a fantastic sales team, a tied relationship with a super aggressive bank…

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  1. Sir
    Nice analysis. Few queries.
    1. Can a retail investor invest in GOI G Sec CONVENIENTLY ?
    2. How does is compare with RBI Bonds currently available at 8 % for 10 years. The corpus of 50 L will become 1.08 cr at the age of 55, and which can be invested prudently. ( The insurance cover part can be taken care by a suitable term plan)

  2. Sir
    To add to my previous comment,I just now read an article on money control on the product. The article says ” IN CASE OF DEATH, THE LUMP SUM IS RETURNED TO THE SPOUSE”
    What is meant by LUMP SUM ? is it the amt invested 50L or the corpus at the time of death ?
    If it is the amt invested, and the death occurs at 55, than the spouse is paid 50 L out of a corpus which has grown in 10 years to 1CR + ??



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