Conventional Savers

The hard core, rigid and conventional savers have some rigid notions about safe saving and may not consider very much about margin of returns. One can call them old fashioned as they can’t think beyond their fixed deposit, public provident fund (PPF) and the ubiquitous insurance policy mostly from Life Insurance Corporation of India. They believe all three serve the same purpose. They force one to save and they offer a modest amount after a long period of time. If they can “Time” the PPF and insurance policy maturity you have a larger retirement corpus. This is what the ‘old Class’ of people think which is evident from talking to such people. Many professional financial planners and advisors rue the fact that it is difficult to convince these people to be more adventurous and explore other options. They can’t see beyond traditional endowment plans (insurance plans with saving elements in them). They are not even interested in ULIPs that is unit-linked insurance plans which offer various investment options.

Here we are trying to review the skewed thinking of these conservative investors. After all, most people still prefer conventional mode of savings to adventurous routes like investing in stocks. The trouble is that returns from these insurance policies have been declining over the years thanks to the low interest in the economy. From double digits, the returns have come down to 4-5%. If anyone is taking this route to build corpus for their long term route, it is a serious mistake. There won’t be much money when the policy matures. The absence of a compounding rate of interest in these policies is major drawback. In regular investments the compounding rate plays a major role in building wealth.

Since these people don’t look beyond insurance companies for investment solutions, they should try the new ULIP products from insurance firms. But opinions about investments in ULIPs are not that favorable as the ULIPs are not transparent and large deductions from first three years premium would work against the interest of the investor. ULIPs are not the best investment vehicle. Ideally these investors should have taken the mutual fund route to build long term corpus.

These investors must learn to understand the latest available investment avenues and should realize that they are likely to earn even lower returns from these policies in future. If they plan to stick to such a conservative investment plan, they should start saving more and setting it aside for their future needs. In most cases, that may be tough advice to follow. The only other way out is to change the mindset and start investing in instrument that would give more returns. That sounds like we are getting back to the familiar theme: buy a term cover and invest difference in premium in a mutual fund on a regular basis.

Financial advisors say it sounds familiar because that is the best way to make sure that one has adequate life insurance cover and at the same time put the money in the best instrument to earn maximum returns.

Buying an endowment plan means investors are most likely to be underinsured since endowment plans are costlier people buy a cover they can afford and that means they wouldn’t have adequate life cover. For example, an investor can buy a Rs 1 lakh endowment plan for a 20-year term with an annual premium of around Rs 5,000. This means he has to shell out an annual premium of Rs 50,000 fo a Rs 10 lakh cover. A Rs 10 lakh term cover on the others would have cost him only Rs 2,500. If they buy a term plan they can buy a large cover with a fraction of the premium. If they are diligent enough to invest the money elsewhere, like say, stock or a mutual fund they can earn better returns.