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This post targets those who already know ELSS or Taxsaver mutual funds. But many people do not know that not all ELSS are the same.
They might know that Tax saver funds are Diversified Equity Mutual funds, yes they are !!! But still, they can be differentiated in the category of :
Aggressive Tax savers :
These are the ELSS who bet more on small-cap and mid-cap, stock and hence have more return potential.
Safe and balanced Tax savers :
They heavily bet on Large Companies, which are more safe then mid-cap or small-cap stocks.
A person who wants to invest in ELSS shall not put money in just 1 ELSS, but 2-3 different ELSS. Again Putting all money in the same type of ELSS is not good, as they will be of the same portfolio type ( i mean more stake in Huge companies and less in Mid and Small-cap)
They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money-back in case they survive the tenure of Insurance.
Common people’s mindset about life insurance
People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money-back plans.
People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.
Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.
Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target for life insurance.
Watch this video to know the difference between life insurance and term insurance:
Case Study
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Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.
Rajesh can afford a maximum of 10% of his salary as an insurance premium outgo in a year.
So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.
If he dies between 2005 – 2025, his family will get Rs 10 lacs.
If he survives till 2025. He will get Rs 10 lacs.
Monthly premium = Rs 2,000
Total premium in a year is 24,000
Cover: Rs 10 lac
There are some points to consider here.
He is highly Uninsured, Rs 10 lacs is very less amount to get covered. He needs at least Rs 25-30 lacs as cover, as he has financial dependents.
The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
In case of survival, he gets Rs 10 lacs but in 2025. Considering inflation at an average of 5%, the current value of that amount will be Rs 3.5 lacs.
This means in 2025 the value of that 10 lacs will be very less and considering that after 20 years Rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him, may be less than what he may be earning in a year.
It means It does not benefit him a lot after 20 years.
He could have solved all of his problems if he would have taken term insurance instead of Endowment Plan …
If he takes Term Plan, he can get a lot more cover in very less premium and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.
He can take a term plan of Rs 30 lacs for 30 years, with an annual premium of 9,000 per year. (including service tax, approx).
So instead of Rs 24000 in a year, he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.
He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for the next 20 years through SIP every month or yearly lump sum.
Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …
Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for the next 20 years.
The investment will be worth
Rs 16 lacs at 15% return
Rs 22 lacs at 18% return
Rs 28 lacs at 20% return
Rs 94 lacs at 30% return (less chance)
Rs 3.14 crore at 40% return (very less chance)
remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.
If we consider this case :
when he has taken Term Insurance He is in profit at any point of time
– If he dies early his family will get 30 lacs + some investments
– If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
– If he survives , his investments are enough 🙂
The biggest thing to consider is that his Family is covered with good amount in case of his death, which is the main factor and sole idea of Life Insurance.
