Five assets you don’t need

We have a lot of financial products available around us assuring very high return. The agents selling these products are paid big fat commissions, driving them to sell the products at any cost. We have to remember that not all such assets will benefit you. So, we have compiled few of such assets that are widely sold in the market, but contribute very little to the holder’s wealth.

1.Endowment plan- Insurance companies take advantage of our “fears”. Are you scared for your dependents after your life? - get a life insurance.Are you scared about any huge medical expenditure? – get a medical insurance.Are you scared of fire destroying your property? -  get a fire insurance.So, this is how it works. You pay a premium, so that in case anything happens, you get a financial support.

One such policy being sold in the market is “endowment plan”. Endowment policy says that you get insured for the term of policy, if anything happens to you, your family will be paid off and if you survive the term, you still get the principal along with interest. This instrument is widely popular for its (negligible) tax benefit.

Sounds attractive?
Now let us go through the numbers-

If Mr. X, deposit Rs 10,000 per month, for 21 years (total investment being Rs 25,20,000) then his sum assured will be Rs 25,65,000 and maturity amount will amount to Rs 54,00,000.

This implies that if god-forbid something happens to Mr. X, he will leave insufficient cover for his family and earn around 3.5% interest if he survives. Please not that this interest rate is worse than that of savings bank account.
There is another type of policy known as “term plans”- where they just provide life insurance to the holder, and do not provide anything if holder survives through the term. But the important thing to note about term plans is that they will provide a more than sufficient cover for your family at a very cheap rate. So, the rest of the money, you can invest in mutual funds which can actually help you generate wealth.

2.The second car- in today’s world, cars have turned from a luxury to a necessity.  It saves you from all the struggles ofola/uber/metro/buses/locals. You can drive anywhere you want and at any time you want.But do you really need a second car?One car is generally needed by all. But a second car? Really?
We have calculated that if you run the second car(hatchback) for 100,000 km in 5 years, you will have to incur a total cost Rs15,00,000, while, if you just book a cab costing Rs 12/km,summing up toRs 12,00,000 for 5 years. And this offer comes with additional benefit of not worrying about parking/ driver tantrums or running out of petrol or no car EMIs, just pay it as you use it.
 

3.4% earning savings account- With advent of digitalization and increase in financial literacy, we have started saving our money in savings bank account. These accounts are highly liquid, safe, with no restrictions on deposit/ withdrawal and also earn a regular interest of 4% on the outstanding balance.

Now, this is what your banker will not tell you, your savings bank account is capable to earn an interest equal to the fixed deposit account.

There is a feature in every banks savings as well as current account, where excess balance over a minimum limit (limit is different for every banks) is automatically sweeped to a term deposit account. In case you add more money, again it is sweeped to the term deposit account, and in case you withdrew/ transferred funds, money is returned back along with the interest.

4.Balanced funds- While investing in mutual funds, investors have option to invest in equity funds (high returns, high risk and high management fee), debt funds (low risk, low return and low management fee) or balanced funds, which combine the benefits of both the funds to manage risks and ensure higher returns. It sounds great, isn’t it?

The problem is fund managers charge higher fee for balanced funds. Consider the following funds along with the management fee-

Type of fund

Name of fund

fee

Equity fund

ICICI prudential value discovery fund

1.99%

Debt fund

ICICI prudential Bond

1.07%

Balanced fund

ICICI prudential balanced advantage fund

1.94%

ICICI balanced fund has invested 47% in equity, while fee charged is almost equal to that of equity fund. So, next time a broker is influencing you to invest in a balanced fund, remember that it is for his own good.

Further, income tax implications on balanced funds are much higher than that of equity-oriented mutual funds.

5.Gold coins- in India, gold coins are considered to be auspicious and traditionally best form of investment. It is liquid and its value also increases over time.  But today, we have smarter options to invest into. Buying gold coins do not give you a regular income; instead, you could enjoy benefit of sovereign gold bond scheme.

Sovereign gold bonds do not require making charges or storage charges, their value increases with the gold bonds. Apart from these, they earn a regular income (as interest @ 2.5 % per annum) every year. If we look into tax perspective, long term capital gains on redemption of sovereign gold bonds are exempt.

Thus, it is really important that you analyze all aspects of the investment opportunity and not just go by the commission-backed advice of your banker or broker. But if you have to get advice from someone, make sure that your advisor is not making money from your investment. If you are looking for unbiased advice welcome to  finology.in.

                                                                                                                                         -By Panjul Agrawal


Posted On: 12 Aug 2019 Home / Investing / Five assets you don’t need