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.

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.

Being a disciplined investor pays off in the long run. For example, those investing in equity mutual funds through Systematic Investment Plans (SIPs) or debt instruments such as post office or bank deposits through recurring plans reap richer benefits in the form of higher growth and returns. However, maturity benefits in these plans remain limited to the returns assumed and to the total instalments paid in case of the unfortunate event of death. ‘LIC Jeevan Saral’ – an innovative offering by Life Insurance Corporation of India – takes care of this point. The endowment assurance plan provides not only financial protection in terms of death benefit throughout the term but also long-term capital growth. One of the unique features of the scheme is it provides risk coverage to the extent of 250 times the monthly premium. No wonder, it helped LIC win the Golden Peacock Innovative Product/Service Award 2009.

Product highlights/benefits
• An endowment assurance plan that provides death benefit up to 250 times the monthly premium plus loyalty additions, if any
• Flexibility to choose premium amount which will in turn decide maturity sum assured
• Minimum monthly premium of Rs. 250 and Rs. 400 for entry age up to 49 years and 50 years and above, respectively. There is no cap on upper investment limit.
• Option to add Death Accident Benefit rider at a very nominal cost
• Loyalty additions if the policy is in force for a minimum of 10 policy years along with guaranteed maturity benefits
• No surrender penalty after 5 policy years; partial withdrawals allowed
• Premiums are payable yearly, half-yearly, quarterly, or monthly.

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Analysis
LIC Jeevan Saral is a unique investment option which cushions one’s investments against the dual risks of death and volatile market conditions and at the same time provides much-needed liquidity. Let us see how this works for a 35-year-old individual.
Suppose the person buys LIC Jeevan Saral policy for an annual premium of Rs. 4,704 for 25 years, with his basic sum assured coming to Rs. 1 lakh. His guaranteed maturity benefit as per LIC benefit illustration will be Rs. 1,35,296, which will further increase to Rs. 2,00,296 and Rs. 3,46,296 if we include loyalty additions and guaranteed maturity benefit at a projected investment rate of return (PIRR) of 6 per cent and 10 per cent, respectively. The net yields at different projected levels are presented in Table 1.

The net yields under LIC Jeevan Saral at the PIRR of 6 per cent and 10 per cent come to 4.16 per cent and 8.05 per cent, respectively.

Equating with other products
Apart from insurance cover, ‘Jeevan Saral’ provides tax benefits and liquidity, so we will compare it with products like recurring deposits (RDs) by post office/banks or PPF (periodic investments) that offer similar benefits. Table 2 depicts how LIC Jeevan Saral and recurring deposits fare against each other.

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Now, we will turn to Table 3 which analyses the performance of two products, RDs and PPF, in comparison with Jeevan Saral. Here, we have assumed that PPF and RD investments continued for 25 years, i.e., returns reinvested throughout the term.

• In case of Jeevan Saral, a 25-year old with an annual investment of Rs. 4,704 at a projected growth rate of 10 per cent (which may or may not be achievable) will earn a net yield of 8.05 per cent, higher than RD (5.94 per cent) and PPF (8.00 per cent).
• In case of RDs, we have considered investors in the tax bracket of 20 per cent. The returns may come down or go up for those in the 30 per cent or 10 per cent tax bracket.
• For PPF investments, the tax-free return comes to 8 per cent. Nevertheless in terms of death benefit, with its inbuilt risk cover Jeevan Saral scores over the other two.
• If the same individual buys a term plan at a premium of Rs. 4,704 for a period of 25 years, he would get an insurance cover of Rs. 16 lakh. But note that there won’t be any maturity benefit, but only death benefit of Rs. 16 lakh.

Tax benefits
• Premium payable for Jeevan Saral and PPF is eligible for tax benefits under Section 80C.
• Maturity proceeds of Jeevan Saral are tax free under Section 10(10D).
• Investments in RDs are not eligible for tax benefits.

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Things to look into
• Returns in LIC Jeevan Saral as shown in Table 3 are calculated at a projected growth rate of 6 per cent and 10 per cent, which may or may not be achievable.
• Loyalty additions or bonuses are not guaranteed.
• RDs or PPF investments do not provide risk cover.

Recommendations
• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits linked to market returns
• Investment horizon: 5 -25 years
• Returns: Moderate in line with FDs/PPF at different conditions
• Beats inflation: No, it won’t be able to beat inflation at assumed growth rate of 6 per cent
• Tax bracket: Preferable for all tax brackets
• Alternatives: Recurring deposits, PPF (periodic investments), mutual funds (SIPs)

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Summing it up
LIC Jeevan Saral will always remain in demand considering that periodic investment schemes have never been out of fashion for small investors. The other draws would be LIC’s proven track record of paying out loyalty bonuses and the decent net return at a projected rate of return of 6 per cent besides the risk cover. However, those looking for a guaranteed return can choose RD or PPF along with a term plan which will provide risk cover at a very nominal premium.

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It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

HDFC’s new home loan product comes at a fixed rate of 8.25 per cent per annum for the first three years (up to March 2012). However, these rates are applicable for loans up to Rs. 30 lakh and a maximum tenure of 20 years, and not on the other two slabs, i.e., loans between Rs. 30 lakh and Rs. 50 lakh; and Rs. 50 lakh and above. From fourth year onwards, HDFC will charge a floating rate of 5 per cent below its retail prime lending rate (RPLR) – the institution’s benchmark rate – on the loan. Currently, the RPLR is 13.75 per cent. This rate is available under special festive offer to all new home loan customers who apply before Jan. 31, 2010 and take at least part disbursement before March 31, 2010. NRIs and PIOs will also be benefitted from the festive offer rate.

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SBI vs HDFC
HDFC’s new loan offer is in direct competition with SBI’s Easy Loan scheme, but it is difficult to guess the winner. Now let us have a rundown on SBI’s Easy Loan scheme. Loans under this scheme are offered at a fixed rate of 8 per cent for the first year, 8.5 per cent the next two years and thereafter at a floating rate of 2.75 per cent below its benchmark rate (SBAR, State Bank Advance Rate) or at a fixed rate of 1.25 per cent below SBAR. Currently, SBAR stands at 11.75 per cent. The comparative rates of both SBI and HDFC are given in Table 1. Recently, SBI extended its special loan offer till March 31, 2009 to maintain its credit growth target and build up retail portfolio in lieu of a slump in commercial lending.

Earlier, HDFC was averse to the idea of discounted rate; it even criticised SBI special home loan scheme. HDFC stressed the point that the teaser rates offered in the initial years could cause widespread defaults when rates surged in later years. So what made HDFC change its stance? It has reasoned that ample liquidity, improved operational efficiency and good quality portfolio have made the discounted rate possible for it. Whatever may be the reason, it is important to see whether borrowers will benefit from these new rates.

Analysis

We, at Rupeetalk, always try to provide fair understanding and impact of the special loan rates on customers (Read: SBI special home loan: A boon or bane?), and what effect they will have on their cash flows.

Read Home loan tax implications

Here, we have analysed HDFC and SBI offers in terms of interests paid in the first three years, total interest paid and effective interest rate for the complete tenure (refer Table 2 and 3).  In Table 2, we see that there is a marginal difference in the first 3-year interest components of both the lenders. However, in terms of total interest payments, HDFC scores over SBI; HDFC borrowers save Rs. 75,683 in interest compared to SBI borrowers. The effective interest rate in case of HDFC comes to 8.69 per cent compared to SBI’s 8.85 per cent.

However, in case of a Rs. 60-lakh loan (refer Table 3), interest component in the first 3 years varies considerably, i.e., 19.90 per cent and 22.34 per cent of the total interest paid for SBI and HDFC, respectively. If the borrower is looking to prepay his/her loan, SBI’s offer would be a good bet in this case. SBI also scores over HDFC in terms of total interest paid, and thus, the effective interest rate comes to 9.69 per cent for SBI in comparison to 9.78 per cent for HDFC. Here, HDFC borrowers end up paying Rs. 70,348 more than SBI borrowers.

No respite for existing customers

It is clear that these schemes are sales gimmick to lure new customers, for the banks have completely ignored their existing customers. These reduced floating rates are not applicable to the existing customers of both the schemes. In this condition, the existing customers can either renegotiate rates with their banks for a levelled interest rate or shift their loan to other lender for a better rate. Note that refinancing a loan may require a customer to pay prepayment penalty as high as 2 per cent.

Conclusion

The steady recovery of the Indian economy has spread cheer to almost every sector, and the real estate market is no exception. After going through a rough patch, it is regaining its composure. This is the time to buy a house for many, with the property prices coming down by 20-30 per cent and banks offering special rates to sell home loans and achieve their individual credit growth targets. SBI and HDFC, which control a sizeable portion of retail lending in India, are better placed to take advantage of these conditions with their special loan schemes. Both the festive rates seem to have marginal difference in terms of effective interest rates, however, borrowers are advised to read the fine print before closing a deal so that there won’t be any regrets later.

Sujay bought a flat in January 2005 and sold it in August 2009. Since he held the property for more than three years, the asset became a long-term asset and the gain, a long-term capital gain. Now, Sujay is worried about the capital gains tax that he has to pay on the gain. He is told that capital gains savings bonds can save him from paying the tax.

What are capital gains savings bonds?

Capital gains savings bonds are a specific type of bonds used for tax-saving purpose. But these are different from regular tax-saving bonds, i.e., only those investors who have a capital gain and would wish to save the tax that has to be paid on this gain can use these bonds. On the other hand, this is not useful for all those who would like to earn tax-free income because these bonds will not provide tax-free income.They are notified by the government and are issued for a specific need and hence might not be useful for everyone. The institutions that issue these bonds are NABARD, NHAI, REC, NHB and SIDBI.

Who can use these bonds?

Any person including individuals, companies, partnership firms and others can use these bonds to save capital gains tax. Here, we shall focus on individuals and their needs.

• All those who have a long-term capital gain and need to pay a tax on it can consider these bonds.
• The bonds are actually useful in cases where there are long-term capital gains from the sale of assets like property or gold and the taxpayer is required to pay tax on the transaction.

Remember, the bonds are not useful for long-term gains made on sale of shares on the stock exchange because this anyway has a zero tax rate.

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Let’s take Sujay’s case now:

If Sujay’s capital gain after considering indexation on the property is Rs 5 lakh,

the capital gains tax he needs to pay will be Rs 1 lakh (20 per cent (without cess) of the gain)

He can save the entire or part of the tax by investing the entire or a part of the Rs 5 lakh in the capital gains tax savings bond.

If he invests a part of the entire gain, say, Rs 4 lakh then deduction will be available on this amount and the tax would have to be paid on the remaining Rs 1 lakh. In this case, the tax payable = Rs 20,000, which means a savings of Rs 80,000.

Conditions to avail tax benefit

To avail tax benefit under Section 54EC on an investment in the capital gains savings bonds, the following conditions have to be met:

• The gain has to be long term in nature. It cannot be used to save short-term capital gains.
• The investment into the bonds has to be made within a time period of six months from the date of the transfer of the asset.
• A maximum of Rs 50 lakh can be invested in the bonds, so there is a restriction on the amount that can be claimed as a benefit also.

What are the options for Sujay?

Sujay can consider specified bonds issued by the Rural Electrification Corporation (REC) and the National Highway Authority of India that have been notified by the government for the purpose of tax saving.

Let’s explore REC issue:

The REC issue consists of bonds that mature in a period of three years and cannot be sold till that point of time. The issue details are as follows:

• Each bond is for a sum of Rs 10,000. The minimum application will be for 1 bond while the maximum can be for 500 bonds.
• These bonds are non-transferable and the date at the end of the month in which the bonds are taken would be considered as the date of allotment.
• The current rate of interest on the bond is 6.25 per cent which is paid on an annual basis on June 30, each year.
• At the end of the three years, the bond will be redeemed at par.
• The interest earned on the bonds will be taxable in the hands of the individual. So the income on the bonds is taxable but investing in the bonds can save capital gains tax for the taxpayer.