What will be the Impact on MF/PPF/FD investment combination If interest rates are very low after 10 years ?

POSTED BY Yogesh K ON February 28, 2012 11:30 am COMMENTS (6)

Hello All,

In most of the discussions many of us have expressed that instead of any child plan or any endowment plan if one invests in term insurance + MF/PPF/FD combination then the returns will be high.
In almost all cases we have assumed some return rate, like PPF will give ~8% returns. But what will happen if interest rates are reduced drastically. In some countries interest rate in banks savings is almost negligible. If similar situation arrives in India after 10 years, then in that case child plan or any endowment plan taken today will provide more returns or even in that situation MF/PPF/FD combination will give more returns ?
Thanks ,


6 replies on this article “What will be the Impact on MF/PPF/FD investment combination If interest rates are very low after 10 years ?”

  1. Dear Yogesh, please do tell from where these endowment policies are earning returns or should I say, where the money is invested under these endowment plans?



  2. Yogesh K says:

    Thanks for responses. I have opinion that one should invest equally in endowment plans & MF/PPF/FD combination. I am comparing investment started today and in-between interest rates go on reducing.
    Let’s assume two persons A & B are starting investment from today. Person A invests in any child plan or any endowment plan which has certain guaranteed returns. Person B invests in MF/PPF/FD combination. Both decide to invest for 15 years.
    If interest rates are reduced in future and/or inflation rate is very less then whether person A will get more returns than person B ?
    I feel it depends on when exactly the rates start decreasing, to what extent and for how much time duration. For me it is very complex to predict returns for person A & person B.
    But my view is it may not be correct to predict that investment in MF/PPF/FD combination will always give higher returns in comparison to endowment plan.

  3. Dear Yogesh, first answer the question – Where do the endowment policies invest our money? The answer to your oqn question lies in this answer to be given by you.



  4. BanyanFA says:

    Hi Yogesh,
    It is a very interesting point which you have asked. Let me answer them one by one :

    1. MFs – these should be the biggest beneficiaries -especially the equity funds as the stock markets would rally if interest rates are low considering it both increases the demand and reduces the cost of production for the companies, hence better earnings.

    2. PPF – this would be one of the best debt products as it would provide tax free 8% + returns. However in low interest rates, I don’t think that government would be able to keep up the rates for PPF at such high levels. However still it would be one of the best products available.

    3. FDs – this would be the worst performing products. However, if you book a FD today for 10 years, it would provide a good return for next 10 years. And after that you would have to decide upon the next best alternative.


  5. That is a very good Question!

    The first Question we need to answer is: Why do we save for the future? The answer is this: Unless one saves small amount over a long period of time it is going to be difficult to fund a future expense just out of normal salary. Again expenses go up each year due to inflation so we need to invest in avenues where the money grows faster than inflation (just to stay afloat) and the additional spread over inflation is the real wealth generation.

    The returns provided in any scenario will roughly be in this INCREASING order:
    1) Savings account interest will be the lowest (just ignore the most recent deregulation changes – they are all ploys to get new customers, thats all)
    2) Endowment plans come next at 4%-5% or 6% if at all
    3) GOI bonds are artificially set at 8%
    4) PPF return is again 8+%
    These 2 are done just to attract people to invest in them.
    5) Fixed Depossits (now they are above PPF GROSS returns, will come back to 8% or 7.5% levels soon
    6) AAA rated Corporate Deposits (ignore lower rated securities/junk bonds)
    7) Stock Market INDEX returns
    8) Selected MF portfolios (over a long term barley 10% of the folios beat the market)
    9) Portfolio of carefully selected Individual Value/Growth stocks

    Due to fiscal and market conditons some items above may change places. As risk rises so does the return. Note that Endowment plans charge you to manage debt while MFs charge you to manage Equity.

    If interest/borrowing rates dip so low in India – like in the US and part of Europe it means:
    A – The demon called INFLATION is low (say 1%) so we are okay to allow people borrow at lower rates (this will in turn fuel inflation, that is a whole other discussion in itself)
    B – The following may be the average expected returns:
    1) Savings account: 0.25% (will still lag inflation)
    2) Endowment plans 0.75%
    3) GOI bonds 1%
    4) PPF return 1.25%
    5) Fixed Depossits 1%
    6) AAA rated Corporate Deposits 1.1%
    7) Stock Market INDEX returns 3% (long term non inflation returns)
    8) Selected MF portfolios 5%
    9) Portfolio of carefully selected Individual Value/Growth stocks 7% or more

    As I said before Endowment plans charge money to manage Debt which is why their returns will always be below FD and Corporate FD returns!

    Equity has an inbuilt cushion against Inflation because rise in prices of raw materials will be passed to end customers as increased finished product costs which will increase net income so it propel stocks higher. This is the reason stock markets do remarkably well in inflationary environments.

    Infact a 11% annualized return on Sensex over 20 years is fuelled in major part by the existing inflation ~ average of 7.5% at least and our Sensex has only a real growth of (11 minus 7.5) = 3.5% over the long term!!

    To summarize: If interest rates fall we wont expect future costs to be way higher so even a 5% return in MF year on year is SUFFICIENT to meet future expenses.

  6. bharat shah says:

    as my normal logic , in that case ,child plan or any endowment plan returns would also align downwards more than term insurance+ ppf/fd/ mf, as they are also investing them mostly in debt instruments( except in case of child plan, you preferred some equity investment). main reason of being dearer is their management and marketing expenses. one more reason to go with term insurance+ ppf/fd/ mf, is the flexibility, i think.

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