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Public Provident Fund (PPF) for investment and tax saving

Most of the times, when individuals talk about tax saving or investments, they usually look at Unit Linked Insurance Plan (ULIPs) and Mutual Funds (ELSS). No doubt both these methods of investment are most popular, but there are other avenues that investors tend to ignore. These alternate investment options have their own benefits and should be looked at. Public Provident Fund aka PPF is one of such investment option. Lets look at it in detail.

Salient Feature of PPF:

  1. Fixed return of 8% compounded yearly.
  2. Invest upto 70,000 every year.
  3. Investment under 80C.
  4. Returns are tax free.
  5. Government backed.

Let us compare PPF with ULIPs and Mutual Funds on all the above points.

  1. You can invest as much as 70,000 or as less as 500 every year in PPF. In ULIP you will have to commit for a regular investment over a period of 3 years or more. MF give you a option of investing at a single go or regular investment through SIP.
  2. ULIPs and Mutual Funds do not guarantee any returns. Though there are a few ULIP product that guarantee some return but none of them match to 8% guarantee.
  3. Investments made in PPF qualify for tax deduction under 80C. In ULIP and ELSS too investments qualify for tax deduction under 80C.
  4. Returns from PPF are tax free same as in ULIP and ELSS.
  5. Lock-in period of PPF is 15 years which is more than either ULIP or ELSS. After 15 years PPF account can be extended further for 5 years.
  6. Partial withdrawal is allowed after 5 years, which is also available in ULIP. In case of ELSS investment can be completely or partially withdrawn after three years.
  7. There are no entry load or exit load, i.e. the entire money you pay earns interest. This is same as ELSS. Most of the ULIP plans have entry load as premium allocation charges and exit load as surrender charges.
  8. In case you need money for some urgency, you can also avail loan against your PPF account.
  9. A lender cannot liquidate your PPF money in case of bankruptcy.

To summarize:

If you are looking for an investment

  1. which gives you tax benefit, with tax free guaranteed returns
  2. where liquidity is not important
  3. which is guaranteed by government

Then PPF is the instrument of investment for you.

Disclaimer: The author of this article is not a certified financial adviser. Read and understand the PPF details well before investing.

Meta: June 18th, 2010 by Ripul Gupta
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Should I surrender my ULIP policy?

I have heard a lot from people that they want to surrender their ULIP policy. How do you decide if you should surrender your policy or not? Here is list of reasons because of which you could be considering surrendering the policy.

1) My policy is not giving good returns.
Generally insurance policies have high premium allocation charges in the first three years. This is the reason why ULIP policies do not give good returns in the first few years. If you did not read the different charges applicable while buying the policy, read them well before you take the decision of surrendering the policy.

2) My agent says there is another policy that will give better returns.
Agent get commission on selling policy. Generally the commission in the first three years is higher than subsequent years. This could be the reason why your insurance agent is asking you to surrender your current policy and take a new one. If you take this new policy you will be paying those extra charges for more three years.

3) Lock-in period of my policy is over.
Your agent told you that your policy comes with a three year lock-in period. That mean if needed you CAN surrender the policy after three years. This does not mean that you SHOULD surrender the policy. Generally ULIP have higher charges in the first three years. If you have already paid the high charges why surrender the policy now?

4) I need money.
It is possible that you have a pressing need of money and want to surrender your policy. If this policy is the only way you can come up with the funds, see if you can make partial withdrawals to meet your needs. Else go ahead and surrender the policy.

Factors you need to look at while surrendering your policy:

1) Pre mature surrendering a policy can attract surrender charges. These charges will reduce the return on investment.

2) You will lose any loyalty the policy has to offer if you surrender it.

3) You may also lose any guaranteed return on your policy.

4) Highest NAV guarantee will also not remain valid if you surrender your policy.

Do consider the above fact, read the policy document that you received with your policy, and make a informed decision while surrendering your policy.

Meta: June 10th, 2010 by Ripul Gupta
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Bajaj Allianz Shield Plus - Why not to invest

Bajaj Allianz Shield Plus is a single premium fixed-term unit linked plan. Let us see, point by point, what your insurance agent will tell you and what he won’t.

  1. This plan claims to give up to 100% allocation on the premium paid
    What your agent wont tell you is 100% allocation is only applicable if you pay a premium of  2,50,000 or more.  For a premium of less than 50,000 there is a premium allocation charge of 1.5% and for premium of between 50,000 and 2,49,999 it is 1%.
  2. This plan gives you a choice of taking a sum assured of 1.1 or 5 times the premium.
    What your agent won’t tell you is that, if you take a sum assured of less than 5 times the premium, your investment will not be entirely eligible for tax rebate under 80C and returns will also not be tax free.
  3. This plan gives you an assured return of 170%.
    What your agent won’t tell you is that this guarantee is on the unit price and not on investment. That mean if you bought the units for Rs 10 you are guaranteed to get a price of Rs 17 per unit on maturity. They do not indicate that the mortality and other charges will be charged by cancellation of units and these canceled units are not available on maturity. Also it is important to note that 170% return over a span of 10 years is equal to about 5.4% interest in a bank account.
  4. Other thing that your agent won’t tell you is that the plan has policy administration charges of 2% per year for the first 5 years and 1.15% from there on. Paying this administration charges will reduce your investment by 17%.

Taking all these points into account, investing into would be a mistake.

Product brochure of this plan can be found here.

Disclaimer: Writer of this article is neither a insurance agent nor a certified financial planner. Read the product brochure before investing.

Meta: May 17th, 2010 by Ripul Gupta
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ICICI Pru Ace - the best ULIP plan to invest in

If you are planning to invest in ULIP, at this date ICICI Prudential Ace seems to be the best plan to invest in. You will not see a lot of advertisements of this plan. I guess this would be because this plan will not need a lot of marketing.

Salient features of the scheme:

  • 100% premium allocation from the very first year.
  • Policy administration charges are fixed and not %age of fund value.
  • Option of funds to invest your money in depending on your risk appetite.
  • High surrender value. 100% after the first 5 policy years.
  • Additional allocation units from the 6th year.
  • Loyalty additions every 5 years from the 10th year.

This is probably the first plan which gives a good chance for your investment to grow. There are no fund allocation charges right from the first year (although top-up premium attract a premium allocation charge of 1%). This mean the whole of the money that you pay will be added to your fund value.  From the 6th year onwards, fund allocation is 102% (i.e. For every Rs 100 that you pay Rs 102 get allocated to your fund). Although this is not applicable for top-ups.

As is the case with other recently launched ULIP plans, this plan also has a fixed policy administration charges of Rs 60 per month.

The fund offers you a choice of eight different funds. Depending on your risk appetite, you can choose appropriate fund to invest in. Out of choices of fund there is also one fund which guarantees some return. Although before investing in this fund, make sure you have read and understood footnote of page 4 of the product brochure.

In case you do not wish to continue with this ULIP plan after 3 years, you can surrender the policy.  If you surrender the policy after 5 year you will get your full fund value. In case you surrender the policy after 3 years, you still get 90% of your fund value, which is quite decent.

Starting from the 10th year, after every 5 years, you also get 2.5% bonus. This bonus is termed as Loyalty additions and  should further boost the returns of the plan.

If  you have spare money on hand and wish to invest in your existing plan, this plan gives you option of paying top-up premium. Paying top-up premium increases your sum assured. The increase of sum assured will be 125 - 500% of top-up. For example if you pay a top-up of 10,000 your sum assured could increase by 12,500 to 50,000.

Verdict:

First true investment ULIP plan, which does not eat up any of your investment. Very flexible, gives lots of choices to customer.

Problem is the plan has so many choices that it can become difficult for the customer to understand all the available options.

All in all plan looks good.

Brochure of the plan could be found here.

Meta: April 15th, 2010 by Ripul Gupta
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