Pension Funds in India

HDFC recently tried to sell me “Classic Pension Insurance Plan”
Here are some of the salient features of the plan:
It is a 30 year plan where for the first 15 years, I would have to shell 1Lakh rupees every year and after 30 years (Nov 2041), I can expect:
1. Guaranteed benefit of 2,488,809/-: Now that is not really a return because it works out a return of 2.135% I guess my savings bank account can deliver more.
2. Same can be said about life cover because the returns one gets a return of 6% on the investment irrespective of the fund performance.
3. If the fund delivers 8% p.a. returns then after 30 years you get a 4.8% return or 45Lakh.
4. If the fund delivers a 10% returns then after 30 years you get an 8.7% return or 109Lakhs.
5. There is a surrender value: You invest 3 Lakhs over 3 years and you get 1L guaranteed in the 4 year. Even if your fund delivers 10% returns, you get 2.8Lakhs. So basically there are severe penalties for premature withdrawal.
Here is my analysis:
1. PPF gives me 8.5% guaranteed. So my returns from PPF match HDFC’s optimistic scenario.
2. If I die even 29 years 11 months and 29 days from the start of the policy, instead of getting 109 Lakhs return, I get only 55 Lakhs. So HDFC will ROB me of 50% of my savings.
3. PPF allows me to take loan/do a premature withdrawal (after 4 years) without any significant penalties. While in HDFC I do not only lose my interest but also the money I have invested.
4. PPF allows me to set the contribution level based on my financial situation. While HDFC will charge a huge penalty if try to delay/reduce my annual payment.
All these make me wonder WHY on EARTH will I invest in HDFC? But again there is no dearth of fools in the planet.
PS: Although PPF is a 15 year plan, you can extend it in 5 year blocks till your end of life.


Bond Market

I was reading this article at Bloomberg and it made me think that how much is the lack of a well developed Bond Market hurting we commoners.

Although some of our money is invested in risky financial instruments like Stocks and Mutual Funds, the bulk of our funds are usually parked in fixed return instruments like Fixed Deposits, NSC, ppf etc. Now although it always feels good to have as much wealth as possible, what good is the money if it is not there when you need it.

It is then when we realize that how the government and the banks exploit lack of market tradeable bonds for their own selfish needs. Money parked in NSC is locked for 6 years and no matter what one does, we cannot get a penny out of it. The only way one can take money out of a LIC policy or ppf is by taking a loan… So effectively I pay interest to LIC for my own money??????

In eras of fluctuating interest rates, banks should be grateful that somebody is prematuring closing a fixed deposit.
eg: I had a 6 month old fixed deposit which gave me 9.5% rate of interest. Since current rate is 8.5%, by closing this FD, I effectively save the bank 1% p.a. on interest alone. However instead of being happy about it, the bank coolly deducted half of the interest which I had already earned as preclosure penalty.

Had I had invested in bond market, I could have easily gone and encashed these bonds at NSE/BSE and even made a handsome profit because these high interest bearing deposits are worth a lot more than what bank gives me credit for.