Review on Lic Policy - Bima Account

LIC Bima Account is the latest product launched by LIC of India on this festive tax season (generally known as JFM , JAN-FEB-MARCH, Tax saving season) . There are mainly two variation of this insurance plan called LIC Bima Account 1 and LIC Bima account 2, which differ a bit in terms of premiums, tenure etc. No wonder that it’s the best time to launch the insurance plan as everyone is looking forward to invest for tax-saving, and when something has a tag of “Guaranteed returns” + “LIC” , its a instant favorite.  A lot of risk-averse investors will be investing in these plans. However It’s important to know what these plans have to offer in terms of returns and see if it’s as transparent as it looks like. The company claims to pay 6% return, but will it be 6% by the time it reaches your hand ? Lets look at it..

Did you notice the above picture? It’s very much related to our financial services industry. Every other financial product has a face, which is shown to public, but if you analyse it further and look at  it from the mirror of IRR , you can see its real face which is too horrifying sometimes .I have tried it find the real face of LIC Bima Account policy here .. Its upto you to decide is it beautiful or not !

Features of LIC Bima Account 1 and LIC Bima Account 2

The chart below gives you an idea of both the variants of the policy . While LIC Bima Account 1 is for investors who can pay smaller premiums , Bima 2 is

for investors who are looking fo paying higher premiums .

The lock in period for these policies is 3 yrs, You can surrender the policy after paying the premium for 1 yr, but you will be paid back only after completion of 3 yrs lock in period .The common part of both the plans is that you will get 6% returns from these plans if you continue paying the premiums till maturity , but only 5% return if you make it as paid up policy. There will be bonus also paid by LIC in these plans, but it would depend on the company experience with the plan and bonus is not guaranteed . Also the bonus will only be applicable for investors who have completed the whole tenure .

Important : Taxation of LIC Bima once DTC is in Force

Another important point worth nothing is taxation of LIC Bima Account policy after Direct Tax Code is in effect . As per DTC , the tax exemption will be allowed only if the the Sum assured is more than 20 times the yearly Premium , however both LIC Bima Account 1 and LIC Bima Account 2 offers options where a person can choose Sum Assured which is less than 20 times the yearly premium

In that case ,they will be able to claim the tax deductions in this current year and next year also , however there after they wont be able to claim any deductions on this policy . I am not sure how many investors are looking at this point . The majority of investors in LIC Bima are going to be from small cities , who will definitely have no idea about this taxation point .

What is the returns from LIC Bima plans ?

This is where one has to pay attention. Note that the returns of 6% are offered only in the Net amount invested (Final Amount in the charts below) . We will take an example of LIC Bima account 2 Plan 806 below .

Suppose you invest 1,00,000 per year in this plan for tenure of 10 yrs ,then at the end of the tenure you will receive  12,36,911 , guess how much actual return does it translate to ? So we have to do an IRR analysis for this to find out the actually CAGR return an investor will get. As per IRR analysis the returns turns out to be 4.217% . So this is the return an investor would earn in 10 yrs , note that is the return without considering any bonus .  For investors who will make the policy paid up or surrender it , for them the IRR would be drastically low and might be as low as 0% or negative also depending on how early investor makes it paid up .

Look at the chart below which shows you the IRR analysis for LIC Bima Account 2 policy 

So the main point here is that why is an investor not informed about the actual return which he gets in his hand ? Why the returns of 6% is shown in a way that common public will not be able to find it out .. One can also show the returns as 9% or 10% and then increase the charges to such a level, so that the investors in hand returns is just 4-5% . These plans are going to generate a lot of attention and crores and crores will be generated. Do you feel it can be called as misselling or Mis-use of Public trust, as the returns are in a way mis-leading ?

This is a question from you as an investor !!!.

Article Shared by Manish Chavan

Review on Reliance Gold Savings Fund (NFO)

Reliance Mutual Fund has launched the Reliance Gold Savings Fund & there is a big buzz in market around this product. What a great time to launch such fund when gold is rising and equities are a bit in problem.  First let’s understand this product, its benefits, taxation, how it’s different from Gold ETFs & later we will see if Worth Investing is or not.

What is Reliance Gold Savings Fund

Reliance Gold Savings Fund is a bit of a new concept of investing in gold as it allows you to invest in gold without a demat account. Reliance Gold Saving fund is a Fund of Fund & it endeavors to near the returns of Reliance Gold Exchange Traded Fund which in turn invests in physical gold.  But unlike a ETF the fund does not require a demat account and the stock market route for buying and selling the units.

Reliance Gold Savings Fund is a passively managed fund suitable for a long term investors, who can invest through SIP or lump sum. As a long term investment it gives an opportunity to invest in the GOLD commodity, in a convenient way, which is one of the fancied assets for any investor.

Features & Benefits of Reliance Gold Savings Fund

Reliance Gold Savings Fund opens a new avenue for investing in gold. This fund enables to reap returns closely to returns provided by Reliance Gold ETF.

1. No need for having demat account: so no need to open a demat account and pay the annual maintenance charges.
2. Systematic Investment Plan (SIP): Benefit your investment by investing through small amount over a period of time. Even Small Amount like Rs 100 or Rs 500
3. Systematic Transfer Plan & Systematic Withdrawal Plan: A benefit of STP and SWP makes it a convenient mutual fund product
4. Easy to Invest & Liquidate: similar to investing in a mutual fund scheme.
5. Purity & Safety: investment is in highest quality gold with no theft or warehousing problems. 

Taxation on Reliance Gold Savings Fund

·         Long Term Capital Gain Tax(after 1 year) of 10 % or 20 % with indexation will be applicable

·         Short Term Capital Gains (before 1 Year) applicable as per tax slab for the investor 

Reliance Gold Saving Fund Vs Gold ETF Fund 

A Gold ETF is an ETF that has gold as the underlying security. So, the value of the ETF is derived from the value of underlying gold. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.

In ETF incure charges like annual maintenance charges for demat account, delivery brokerages charges, transaction charges incurred for investing through the dematerialized mode. The investors will be bearing the recurring expenses of the scheme, in addition to the expenses of underlying Scheme.

Hidden points in Reliance Gold Savings Fund

Now comes the warning sign board which normally is hidden in the scheme related document so here it is…

The investors of the Scheme will bear dual recurring expenses and possibly dual loads, viz, those of the Scheme and those of the underlying Schemes. Hence the investor under the Scheme may receive lower pre-tax returns than what they could have received if they had invested directly in the underlying Schemes in the same proportions.”

Should you buy Reliance Gold Savings Fund

Everyone is ready to convince you that gold price will only go higher but we just want to say – gold should be small part of asset allocation and the reason of buying gold should not be rise in price. I think I have already expressed my views on Gold Prices & also shown you expenses in this product. End of the day it’s your hard earned money.

I would still advice demat account holders to Invest in Gold via ETF Route only.. It will give you more returns that this fund.

Many Analyst will show you Gold Return for last 5 Year & 10 year – ask them for 20 years & 30 years chart. You will find gold have even underperformed Fixed Deposits.

Have you ever wondered where were these guys 5 years back when gold was 1/3rd of its current price??

Review on IDFC Infrastructure Equity Fund (NFO)

IDFC Mutual Fund is offering an open ended equity fund focused on Infrastructure theme from Feb 14 to Feb 28, 2011.

At a time when all Infrastructure funds are under-performing the equity diversified funds, I was skeptical of IDFC bringing on yet another Infrastructure fund. (Even though they should have been the first to launch, IDFC being a infrastructure development company!!)

But the contrarian rule of investing says, buy when others are selling that stock and sell when everybody is buying! So it might be an interesting thing to dig in deeper. Let’s go in.

Why Sector Funds Do Not Make Sense

It’s good to start with some skepticism. Stock market investing is a continuous process of finding new ideas and identifying future growth sectors.
But once a sector gets into mainstream discussions on TV/Print/etc, everyone rushes in to invest in that sector. So while everyone is buying into that sector, the valuations sky-rocket and newer entrants pay a heavy price for entering into that growth sector.

Street smart companies get into that sector and make money with the help of the investor frenzy as all companies in that sector get increasing good valuations.

So all this creates a sector bubble and all it takes is a prick!


What About Infrastructure Sector?

The infrastructure theme has been in the news for a good part of the last decade. India’s biggest bottleneck is infrastructure and India really needs this sector to grow and prosper. The India growth story will be built on Infrastructure.

With this in mind, a lot of Infrastructure funds came up and the demand for such stocks was very high. The valuations in 2007-08 went sky high. A lot of Real Estate companies took advantage of that bubble and were quoting at astronomical PE.

Meanwhile, while some of the business scaled in size it was at the cost of profitability. Few companies could match the balance sheet build up with commensurate profits. As a result scores of them report a virtual single digit return on their capital employed.

All this was further aggravated with the challenges that long term projects face – timely availability of cheap capital, execution delays, material availability and policy risks.


What is the Opportunity in Infrastructure?

The opportunity remains as significant as ever.

We are short on power capacity. Our current peak power demand is estimated at 190GW and given our projected growth we will need significantly higher generating capacity. The Chinese will deliver a generating capacity of well over 900GW into this year while the USA is slightly ahead of the Chinese.

In the roads we have one of the largest private public partnership programmes in the world.

Investment in ports by the private sector are dotting the coastline and a private port in the next couple of years with be amongst the top two in the country.

Airports, Metros etc are all assets that have been tendered out to the private sector.


What IDFC MF says :


We believe that infra sector will see return of profitability and sizeable reduction in balance sheet/debt by all companies operating in this space. With this high conviction idea we are doing a soft launch of our Infrastructure fund, the fund is designed to be ‘true-to-label’

Even though I started out skeptical of “yet another Infrastructure” fund and the risk of confining yourself to one sector which is prone to a bubble, I also see the merit of getting into infrastructure stocks/funds when the valuations are favorable and the growth prospects sounds good.