LIC as the next UTI?

I was never a fan of Life Insurance Corporation of India. I has two LIC money back policy (Bima Gold), which I have closed recently. The endowment policy is still running but I am slowly building up the courage to close that policy and take whatever surrender value has accrued. Yes, it will be a big loss but it’s better to get robbed one time than getting robed yearly for the next 25 years. Sounds stupid? Well then it’s going to be a long discussion. But in short if you calculate the bonus rate of LIC policies, the return comes at a alarming rate of 4-6% per annum. Well at least I have figured out better ways to park my hard earned money. Besides Insurance should be taken as a standalone basis and not as a mode of investment (99% of Indians mix insurance with investment). But let LIC continue with its policies and their periodic fleecing – I am not much interested. If you are a LIC fan God bless you. But what concerns me are some reports in newspapers of late comparing LIC as the next UTI. And i agree with the points. For the uninitiated in 1993 UTI mutual fund failed and the government had to pitch in to protect the investors. The government had no binding to bail the investors out but still it did that in some larger self interest. One of the reason was UTI money was always used by the government for projects for which getting money was extremely difficult. So the taxpayers’ money was used to bail this stupid UTI. And in the process the government also shielded the big honchos inside UTI who led to its fall. Now LIC is also following the same route. Recently the IPOs of public sector companies were not much subscribed by institutional investors. But LIC mopped up all the shares. If the IPO valuation was attractive why did the institutional investors and other private parties not show any interest? Something must be wrong. So you can easily sense that in this case LIC money is been used to bail out the IPOs, which is like bailing out the government itself. LIC insurance money is invested in various places for which not much accountability or transparency is there. And this trend has a long history. Besides like UTI, LIC also pitches its product with a hidden assurance of government gurrantee. So I feel we should not be surprised if something like UTI happens to LIC as well. Every king goes to grave someday. And LIC is no exception.

JagoInvestor...Jago!

India is a savings oriented country. We are masters in hoarding cash. But when it comes to investing money, we lag far behind. As a nation, we are totally ignorant of the simple concept called Time Value of Money. My better half feels more comfortable parking all her money in savings a/c then opening a Fixed deposit. A bird in hand is worth two in Bush. Come March she is furious – forceful savings of one lakh for tax savings. And I am sure she is not alone. We have millions like her. Even few years back I was also in the same boat. But thanks to some terrific friends (Specially my morning notes colleague in Copal Partners) and some heavy dose of business channels and Outlook Money – I can now figure out how a LIC endowment policy fools the gullible Indians. I would like to take this opportunity to thank a young guy called Manish Chauhan. I landed up on his blog http://www.jagoinvestor.com/ when I was doing a search on the benefits of a pure term insurance policy over a ULIP. And I was simply spellbound seeing his massive intelligent writings on financial planning. He has taken up the crusade of educating the Indians regarding the importance of financial planning and basic investment knowledge. Kudos to Manish! I am sure God will reward you for this amazing work. Keep it going. You have me as your permanent fan buddy!

I would like to share a small incident that happened at HDFC bank last week. I went there to complete my wife’s one lakh investment for tax savings. Yes I should have completed this at the very beginning of the financial year itself..but a lazy bum I am! Anyway I had already decided what to do! 60% in debt and 40% in equity. Didn’t want to go for NSC as I was not sure where I will be after 6 years and transferring money from one post office to another is a big pain. So I went to the bank and told to put Rs 40000 in HDFC Tax saver mutual fund and the rest in the 5 year tax saving fixed deposit. An extremely smart guy was sitting opposite me. He politely told me “Sir I think you should think over the investments. We have some terrific plans which will give more returns than mutual fund. Plus there is huge market risk in Mutual Fund while in our special plan you get 10% assured”.

I understood that this guy was pitching something which was fully loaded in his favor and not mine. I wanted a little more clarity. I asked him to explain. He then told that the money will be parked for 5 years and it will be invested in high quality debt instruments. And it will give 10% assured and can go higher.

“Can I see the details? Some brochure?” I asked.

“We do not have the brochure sir. Just the application form is with us. This is a special plan and huge investments have come in this product. This will be better for you instead of Mutual Fund”. He was excited. Probably he was imagining his commission!

“You are saying 10% assured. You are investing in the debt market. Period. From where comes the 10% fixed return guarantee?” I asked.

“Sir the previous returns have been extremely good. So minimum 10% you will get. Besides this product invests only in debt market so no equity exposure for you sir. No risk!” He was pitching hard.

“Previous returns mean future is not secure. And the mutual fund I am talking about has given a return of around 18% since inception in 1993. So don’t you think it will be better if I park my money here? Both the products has risk. And I want to take the risk friend”.

“Sir you will also get bonus in this plan. And there are no charges. In mutual fund there are fund management charges which will pull down your IRR. IRR you understand sir? Internal rate of Return. (he was giving fundas now to impress me). This will go down. I can show you an investor’s bonus statement”

He showed me a paper from April 2009. And this was March 2010. Anyway I had a close look. It mentioned a death benefit of Rs 8 lakh. I was furious.
“What is this death benefit?”
“Sir this policy pays you money on death”
“And what about the mortality charges then? I am sure you cannot offer insurance without this charge.”
He was silent. Another guy from the bank who was observing our conversation told “Rs 150 per year sir. Including everything”

I tried to cool myself. These guys were trying to sell me some ULIP. I imagined my travel writer friend. What would have he done with this kind of a high octane marketing onslaught? These devils could have easily fox him…he is so gullible when investment and money is concerned. But he is a writer…they are never good with money!

Anyway I told the guy politely to put the money in Mutual Fund. And he did it. But he was unhappy. Huge commission, which he could have earned by simply making me sign over the dotted lines…he just missed it. Most of the times people like him are successful because we are not aware about money. In search of assured returns we make mistakes. We Indians are fixated with the world “Guarantee”! And LIC exploits us using this fixation. And we take words at face value. Unless we stand up and question…it’s going to be a one sided game where we will always be the losers. And this is where a site like http://www.jagoinvestor.com/ comes in. I love the way Manish has put his heart in to this. So let us all unite. Let’s make a promise to our self: we will never ever take any financial product without understanding in detail what it is all about. Remember that the best financial products for simple investors like us are the ones that are least complex. So next time when someone pushes you to take a ULIP: compare it against a pure term policy coupled with a good mutual fund. Then calculate the returns. If you have questions seek out the answers. It’s all available free at http://www.jagoinvestor.com/