Endowment plans were the darling of insurance companies, before ULIPs came into the picture. Over the years they might have lost their top slot but are not out of demand; conservative investors still prefer them for their survival benefits, which are missing in term plans. ‘LIC Jeevan Anand’ is one such popular endowment assurance plan which also comes with whole life benefits.

Product highlights/benefits

• An endowment assurance cum whole-life plan that provides survival benefits in the form of a lump sum at the end of term and also pays an additional sum assured to the nominee on the death of insured till the end of life
• In addition to sum assured, it pays simple reversionary bonuses and terminal bonus, if any

Highlights

It’s a unique endowment plan that offers whole life benefits at a little extra cost Whole life risk cover continues even after the premium paying term is over, till the death of the insured Double accident benefit is available during the premium paying term and thereafter up to age 70

• An additional accidental cover (up to Rs. 5 lakh) is paid as a lump sum on death due to accident, up to the age of 70. No additional premium required.
• Option to get extra protection at a very nominal cost
• Guaranteed surrender value up to 30 per cent of the total premium paid, excluding first-year premium and other riders’ premium after 3 policy years
• Policy available to people in the age group of 18-65 years. Premium paying term is 5-57 years.

Analysis

LIC Jeevan Anand provides the dual benefit of endowment and whole life plans, for a little extra premium. A 30-year-old individual will have to pay an annual premium of Rs. 20,978 for Rs. 5-lakh cover with a term of 25 years. Let’s see what benefits he will receive. LIC Jeevan Anand has a good bonus history since its inception in Feb. 2002. On an average, it has declared an annual bonus of Rs. 46.5 per thousand. For our calculation, we will take the average bonus at Rs. 45 per thousand (refer Table 1). Considering that LIC has distributed Final (Additional) Bonus (FAB) in its other schemes consistently, we assume an FAB of Rs. 550 per thousand in Jeevan Anand (in line with other schemes under similar conditions) at the end of term. As per Table 1, net return in this case comes to 6.60 per cent (approx.). Besides, the policyholder enjoys an accidental benefit of Rs. 5 lakh till the age of 70 and death benefit of Rs. 5 lakh (similar to the initial cover) till the end of his life. If we take into account these benefits, the return (gross of charges) will further increase for the policyholder.

Now take a look at Table 2. It presents endowment plans by other insurers. These plans are cheaper than LIC Jeevan Anand and have similar benefits. But they do not offer the whole life benefit.  Moreover, the bonus rates announced in these products are not at par with LIC Jeevan Anand.

Thus, at the outset, LIC Jeevan Anand looks a little expensive than plain vanilla endowment plans but given the benefits in later years, the additional cost is justified.

Equating with other products

We always advise against mixing insurance with investment. As there are no similar products available in the market, we will compare LIC Jeevan Anand with a combination of a term plan and PPF (based on their benefits). But the term plan will provide cover till the age of 65 only, unlike in Jeevan Anand where whole life benefits continue till the end of the individual’s life. One can also combine a whole life policy with PPF. But again the policyholder will need to pay premium till the end of his/her life. This sets LIC Jeevan Anand apart from other non-ulip policies. Now, let us turn to Table 3 for a comparative analysis between Jeevan Anand and other asset classes. The term plan (SBI Life Shield) has been taken for an individual of 30 years for a period of 25 years for a sum of Rs. 5 lakh at an annual premium of Rs. 1,632. An additional accident cum disability benefit (Royal Sundaram Accident Shield) for Rs. 5 lakh has been taken at Rs. 589 per year. The remaining amount of Rs. 18,757 has been invested in other asset classes for a period of 25 years as mentioned in the table 3.

Tax benefits

• Premium paid up to Rs. 1 lakh is tax exempt under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The additional whole life benefit comes at an inflated price (refer Table 2).
• Reversionary bonus, though announced regularly, is not guaranteed. Moreover, Final Additional Bonus (FAB) is also not guaranteed.

Recommendations

• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits are linked to performance of the company in future
• Investment horizon: 5-57 years
• Returns (post tax): Moderate in line with debt funds at different conditions. But unlike debt funds, it provides tax benefits under Sec 80C in addition.
• Beats inflation: No, it won’t be able to beat inflation even in case of a longer term
• Tax bracket: Preferable for all tax brackets
• Alternatives: Whole life plan, PPF plus term plan, mutual fund (through SIPs) plus term plan, etc.

Bonanza year 2009 ended on a happy note and would be remembered for many reasons. Indian stock markets recovered remarkably from their March 2009 lows and went on to register the best year-to-date (YTD) performance in the history of Indian stock market since 1991, with more than 80 per cent return in 2009 and above 110 per cent from their March lows. But it was not all rosy for the investor community, especially for retail investors, with some of them managing the bull ride and a majority missing it.

Indian key benchmark indices, BSE’s Sensex and NSE’s S&P CNX Nifty, moved northward from a low of 9,647.31 and 2,959.15 as on Dec. 31, 2008 to 17,464.81 and 5,201.05 as on Dec. 31, 2009 respectively, a splendid gain of more than 75 per cent for both bourses. Similarly, stock prices too multiplied; some stock prices tripled or even more. The ‘double dhamaka’ was common among all stocks. The fundamentally-strong stocks did exceptionally well, beating their own all-time highs of 2007-08 boom. However, the rally was driven by foreign inflows rather than domestic inflows. The foreign investments touched $17 billion – an all-time high – in 2009, thanks to the continued low interest rate regime in the developed economies which prompted FIIs to invest in the developing countries. Despite India ranks among the countries with high domestic savings rates in the world, Indian stock markets remain largely dependant on foreign inflows. Indians are still not taking to stock trading in a big way, either directly or through mutual funds. Currently, only 7 per cent of the total savings goes into mutual funds and the rest into other non-equity instruments; bank fixed deposits lap up a major share.

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Now let’s check out the performance of stocks listed on NSE’s index S&P CNX Nifty – one of the highly-traded indices in India – which comprises 50 well diversified stocks from 22 sectors of the Indian economy.

The list of top performers comes as a surprise. The auto sector which was on the verge of collapse in 2008 revived dramatically in 2009, thanks to the government’s active support in the form of allowing increased depreciation and other policies. Tata Motors and Mahindra & Mahindra clocked the highest returns of 395.18 per cent and 293.75 per cent, each. Though Tata Motors is still reeling under the debt of Jaguar Deal it hopes to avert debt crisis with the help of increased sales activity and ‘Nano’ magic, surpassing the last boom period. The steel sector too made a dramatic turnaround. SAIL and Tata Steel gained 211.87 per cent and 184.39 per cent, respectively. Moreover, these two emerged as the largest in the world in terms of profit, leaving behind steel giant Mittal Steel. IT stocks too gave a decent return. In comparison, IT-dominated mutual funds have provided the highest return in the same year. However, telecom stocks are bleeding as companies are facing an added revenue pressure due to one-second billing.

Read: 7 tips for investing in stocks

But as we always advise, investors should not take into account only the past year’s performance to select stocks. The other factors they need to look at are Price/Earnings ratio (PE), Price/Book value (PBV), Return on Equity (RoE) and other fundamentals of a company. Though the current valuations may not look cheap and attractive enough, the growth saga will continue for the domestic markets. So if you are looking at a long-term investment, equity investment will serve your purpose.  Happy Investing!

Mutual funds are an ideal product for the retail investors who do not have the required knowledge or time to invest in stocks. They have become an effective means to create wealth by maximising returns and minimising risks.

Indian mutual fund industry experienced a bad patch in 2008 when it was hit by liquidity crunch coupled with the global liquidity crisis. The industry, which was growing at 30-50 per cent in terms of AUM on year-to-year basis, plummeted to an AUM of Rs. 4.02 lakh crore in Nov. 2008 from a high of almost Rs. 6 lakh crore in May 2008, a substantial fall of 33 per cent in just six months. The SEBI and RBI acted swiftly and opened a new lending window for all mutual fund players.

Monetisation of the economy by the government along with the improved economic sentiments lifted the ailing Indian mutual fund industry in 2009. In addition, SEBI announced a series of investor-friendly regulations – from no-entry loads to online trading of mutual fund units on stock exchanges – which made it difficult for small distributors and Independent Financial Advisors (IFAs) to earn commissions. The average AUMs touched a new high crossing Rs. 8 lakh crore in Nov. 2009; it was mainly driven by corporate money which flowed in Liquid Funds, Liquid Plus Funds along with Income Funds. However, Equity Funds witnessed continuous outflows month-after-month indicating no major resurgence of confidence among retail investors albeit the markets gained renewed confidence. One of the reasons is said to be the IFAs that have switched their loyalties to insurance companies selling ulips. They have not fallen for the bait of extra bucks that fund houses are ready to shell out to bring them back.

Now coming to the performance, mid- and small-cap funds – which bore the maximum brunt during 2008 downturn – emerged as the best performer in 2009. In the diversified equity category, the top ten performing funds are as given below:

The above table presents the best performing diversified equity funds, picked from large cap funds, mid-cap funds and small-cap funds, including thematic funds. We have taken into consideration the fund performance in 2009 only.

Readers should not consider the list as a criterion to select a mutual fund scheme as there are other important factors that they need to take into account. So how to choose a mutual fund scheme? Check performance record of a scheme, preferably over 3 years and 5 years, along with its risk-adjusted returns. Go for the schemes that have consistently beaten their benchmark over a longer period, looking at Jensen’s Alpha will help.

Year 2009 turned out to be a significant year for many reasons. The Indian investor ushered in the year with the country’s economy still reeling under the effects of sub-prime crisis that engulfed global economies and led to the fall of giants like Lehman Brothers. At home front too the signs were not positive. Satyam fraud scandal shocked everyone, putting a question mark on the credibility of the country’s tech services industry. But slowly and steadily, things changed for the better. The government along with the Reserve Bank of India helped with their monetary and fiscal policies. The faith in Satyam was somewhat restored by employing some tough measures, including a gradual leadership change. The result: a major stock price boom. The markets rebounded and touched a new high (for majority of the stocks). However, the benefits did not trickle down to retail investors who suffered major losses due to volatility of markets.

During the year, various investment products performed differently; some assets such as gold touched new highs despite a downturn. In this three-part series, we will pick ten schemes in a product category that have not only survived the year but performed superbly to beat others. In the first article, let us get a rundown on unit-linked investment products, ulips.

Unit-linked Investment Products (Ulips)

Ulips are investment-cum-insurance products that involve high investment costs in terms of premium allocation charges, policy administration charges, fund management charges and other miscellaneous charges. However, investment funds under all ulip products provide returns that are largely unaffected by investment costs. To some extent, fund management charges can mar their performance. The top ten performing ulips across categories (in terms of absolute returns) in the last one year are presented below:

The returns do not represent the overall performance of ulips as there are various costs, as discussed above that can affect the performance in terms of net returns. Also, investors should not get swayed by the one-year return only as there are other factors that help in deciding the best ulip. However, there is a New Year bonanza waiting for all new and existing ulip investors in the form of less total charges. With the new guidelines in place, ulips with a term up to 10 years and more than 10 years will have a total charge of only 3 per cent and 2.25 per cent, respectively.

Birla SunLife Dream Plan is a unit-linked insurance plan (ULIP) that provides the double benefit of higher sum assured and guaranteed maturity benefit at a cost lower than the traditional term plan. In addition, it does not carry any premium allocation charges (PAC), probably the only plan in the market with a no-load structure, albeit there is a 2 per cent PAC on top-up premium.

Product highlights

• A ULIP with a term ranging from 5 to 25 years for an individual between 18 to 60 years of age at entry; the maximum age at maturity is 75 years.
• Option to choose Guaranteed Maturity Benefit (GMB) with an upside potential based on the performance of funds chosen. This assures that you will receive no less than the GMB when the plan matures.

Highlights

This is a good alternative for a traditional term plan, and also carries features of a ULIP This is one of the cheapest ULIPs in the market Though it comes with lots of benefits, the charges are a little higher

• Option to choose Guaranteed Maturity Options (GMO), i.e., 100 per cent, 200 per cent and 300 per cent with three separate maturity amount payout schedules
• A minimum guaranteed return of 3 per cent p.a. on the premium paid less other charges
• Partial withdrawals allowed after 3 policy years; it does not affect the GMB.
• Policy surrender allowed after 3 policy years, with maximum payout up to the fund value at that time
• The cheapest ULIP product, with no premium allocation charges

Investment fund options

• The investor has an option to choose from three investment funds – Protector, Builder and Enhancer – as shown in Table 1.

The premium (minus charges) can be invested in any of the fund options or a combination of all three. The three funds follow a balanced approach to investment, and hence can be an ideal choice for investors with low to medium risk appetite.

Charges you pay

• Premium allocation charge

No premium allocation charge is deducted from your premium, except for the 2 per cent charge that is levied on the top-up premium.

• Fund management charge (FMC)

FMC varies from 1 per cent to 1.25 per cent per year with a maximum cap of 1.5 per cent (Table 1).

• Policy administration charge and mortality charge

Policy administration charges are on the higher side. For example, in case of a 20-year policy with a basic sum assured of Rs. 590, the charges will be Rs. 12.91 for the first three years and Rs. 13.23 for the remaining years, compared to the normal charge of Rs. 2 to Rs. 3. Mortality charge is also high as compared to other ULIP plans.

• Surrender and revival charge

Policy revival charge is Rs. 100, which can go up to Rs. 1,000 at the company’s discretion. A surrender charge will be applicable if the policy is returned in the first 3 policy years.

• Other policy charges

Two fund switches, two partial withdrawals and two premium redirections are allowed free per year at an additional cost of Rs. 100, with a maximum cap of Rs. 500 per additional request.

Incentives

1. Maturity benefit

• Guaranteed maturity amount depending upon GMO along with the fund value is paid at the time of maturity.

• A guaranteed return of 3 per cent per annum on net premium is applicable.

2. Death benefit

The nominee will receive basic sum assured, enhanced sum assured plus the higher of Fund Value and Guaranteed Fund Value.

3. The plan offers discounts at higher guaranteed maturity benefit amounts based on different bands.

Performance

Let us find out how this plan fares from its cost-benefit analysis, which is based on certain assumptions. For a 26-year-old male individual with the guaranteed maturity benefit (GMB) of Rs. 75,000, guaranteed maturity option of 300 per cent on GMB and enhanced sum assured of Rs. 50 lakh for a period of 25 years, the net return (gross of mortality charges) comes to 4.25 per cent and 8.24 per cent at an assumed growth rate of 6 per cent and 10 per cent, respectively. These returns are well above the minimum return prescribed by the regulator (i.e., 2.25 per cent for a policy with maturity period of more than 10 years). However, if we exclude the mortality charges, the net return will be negative.

• Table 2 sums up the performance of the three funds as on Sept. 30, 2009.

• In Enhancer fund, 28.44 per cent investment is made in equities. Out of this investment, 25.40 per cent, 13.21 per cent and 11.17 per cent go to banking, oil & gas and capital goods, respectively as the top 3 sectors.
• All three funds (Protector, Builder and Enhancer) have cash allocation, including money market instruments, in the ratio of 18.98 per cent to 11.20 per cent to 17.38 per cent, which may prove to be a boon for the funds in months to come as the market may see some correction in the near term.
• However, the average maturity of debt holdings is 5.14 to 6.72 years which can be fatal in the near term as the market can see unwinding of the monetary policies which will shoot up debt yields, leading to devaluation of the portfolio. Higher the interest rate, lower will be the average duration and debt value, and vice versa.

Equating with other products

A comparative analysis of BSLI Dream Plan with other investment products (Table 3) throws up some interesting facts.

• In case of Dream Plan, for a 30-year-old male individual opting for a GMB of Rs. 75,000 (100 per cent GMO) with an enhanced sum assurance of Rs. 50 lakh, the annual premium comes to Rs. 13,378 for 20 years with a maturity benefit of Rs. 1.82 lakh. The total premium paid in a span of 20 years exceeds the maturity benefit at both assumed interest level of 6 per cent and 10 per cent, thus, giving a net negative return. It happens because most of the premium amount goes in providing insurance cover of Rs 50 lakh. But if he invests in a combination product of PPF and a normal term plan for the same insurance cover of Rs. 50 lakh, his annual premium comes to Rs. 5,200 and the return is 3.39 per cent.
• In BSLI Premium Back Term Plan, the same benefits come at an annual premium of Rs. 42,422 with a maturity benefit of Rs. 8.4 lakh. But the net return is zero.

Tax benefits

• Premium payable under BSLI Dream Plan up to Rs. 1 lakh is eligible for tax benefits under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The plan is preferably for an individual looking for an enhanced basic sum assured.
• The policy administration charge and mortality charge are exorbitantly high.
• Opting for riders will further reduce your return as units will be reduced in proportion to cover the monthly rider premium charge.

Recommendations

• For whom – Conservative investors willing to put money for a longer period
• Risk – Safe capital; maturity benefits linked to market returns
• Investment horizon – 5-25 years
• Returns – More in comparison to customised investment product providing same benefit
• Beats inflation – No, it won’t be able to beat inflation at an assumed growth rate of 6 per cent
• Tax bracket – Preferable for all tax brackets
• Alternatives – Term plan with the return of premium option, PPF with term plan

Summing it up

BSLI Dream Plan is ideal for those who are looking for an enhanced sum assured with moderate maturity benefits (in case of 100 per cent GMO). The other GMOs, i.e., 200 per cent and 300 per cent provide increased maturity benefits but come with high policy administration charges and mortality charges. In our opinion, the overheads are abrupt and the guaranteed 3 per cent return also does not look exciting enough. Moreover, investors can lose the trivial 3 per cent return if premiums are not paid in time.