When we decided to invest from our surplus, the main motto for many of us is to look for the BEST product available on this earth. During this unrealistic search, we end up with a product that is tagged as “Guaranteed, Tax-Free, and Safe Investment in India”. Whether there is any such product that offers all these features?
In my earlier posts also I have pointed that to sell any financial product in India if the seller tags these three keywords – Guaranteed, Tax-Free, and Safe investment, people will line up to buy. Sellers know the mental behavior of the buyers. Hence, they often tag these keywords with their products.
Guaranteed, Tax-Free, and Safe Investment in India
Now, let us look into these features of a financial product, and let me explain to you why you should skip if someone is offering you these features in a product.
Let us now look into the keyword GUARANTEED. This keyword is often used by Life Insurance companies. They mention to you that their product is offering you the GUARANTEED returns. Is it true? The answer is YES and NO.
Usually, in such products, they offer Bonus or GUARANTEED ADDITION on yearly basis to your policy. This they claim as GUARANTEED. Even though it is GUARANTEED but you have to think of whether the value will increase by each policy period or whatever they declared for a year will remain the same?
Let me explain the concept. Assume that your policy sum assured is Rs.1,000, term 20 years, and the insurance company claiming Rs.50 as GA per Rs.1,000 sum assured per year. So you will get Rs.50 in the first year and second year another Rs.50. It will continue up to the end of the policy period. Each year’s Rs.50 will turn to be Rs.1,000 after 20 years. This they will give you on 20th-year completion.
They will not add a single penny to the first year Rs.50 for the next 19 years and the same way the second year Rs.50 will not earn a single penny additionally for the next 18 years. Just imagine the value of today’s Rs.50 after 20 years?
Even if we assume the inflation of 6% and do the reverse inflation to arrive at the current value, then it is not Rs.50 but Rs.14 what they are giving us. The time value of money is the most important aspect when you are investing.
In whatever way you calculate, such guaranteed products do not generate more than 6% returns.
When someone is offering you a product, you have to think as if you are a Life Insurance Company. Assume that someone is giving you Rs.100 and after all the cost (Agents commission, Admin Charges and Investment cost), if insurance company left with Rs.90 also, then to give you even the expected 6% returns, they have to generate it from Rs.90 but not from Rs.100 as they left with Rs.90 to invest. Hence, to generate 6% GUARANTEED returns to you, they have to invest somewhere they have to generate GUARANTEED returns of 17% a year. Which product on this earth will offer you 17% returns a year and that also with GUARANTEE?
Even if such products giving you 5% guaranteed returns, then as per me, they are striving hard to give you that much 🙂 But at what cost?? Investing for 20 years and generating a negative real return (Return on investment-Inflation Rate), is nothing but you are losing the value of money. Such products are not wealth creators but wealth destroyers. BEWARE..
Nothing is guaranteed on this earth. If someone is offering you something at guarantee, then there is a catch and it is losing your money value in the long run.
The second important tag which we have to beware of is Tax-Saving or Tax-Free. Many salaried usually have to submit their investment proof during the period of December or January. When they open their eyes at that time, they feel they have not done enough to save tax. Hence, they rush to save the tax as much as possible by whatever they way.
Sensing this mad rush, many new products used to be launched during the period of December to March. Our main idea of investing is tax-free and blindly we invest in such products. But we never understand how such products help us to achieve our financial goals and what are the risk involved in such products.
The classic example of such products is one-time investment products offered by Life Insurance companies and ELSS schemes (we jump into ELSS mainly as it offers us to save tax and the minimum lock-in).
Coming back to Tax-Free, the maturity of many insurance products are tax-free (Read my posts to understand the taxation on life insurance “Tax Benefits of Life Insurance“, “Budget 2021 – All about the Taxation of ULIPs” and “Taxation on ULIP Surrender – Before or after 5 Yrs“). However, there are many wonderful products in the market which offer such tax-free and gives you better returns than such low-yielding products. The example of such products -PPF, EPF or SSY.
Running behind tax for each investment is something called MADNESS. I know that we have to plan for taxation. But it does not mean that our primary purpose of investment should be to look for Tax-Saving or Tax-Free.
As per my knowledge, except Government Of India Bonds, products offered by Government (like PMVVY) and Post Office Schemes, rest all comes with certain risks in one way or another way.
In my last post, I have explained how sometimes looking for safe may turn to be a disaster “Avoiding RISK is RISKY!!“. There is nothing called SAFE when you invest. In one way or another way, we are playing with risk (knowingly or unknowingly). Even if someone is offering you this tag called SAFE, first check out who is offering you. How safe is the business module of the provider and why they are highlighting this SAFE keyword.
If someone is offering you the product as SAFE, then there are always certain loopholes like the lowest returns, for shortest period, or lies. Hence, beware if someone claims they are offering you safe investment products.
Conclusion- I know it is a dream for all of us to look for Guaranteed, Tax-Free, and Safe Investment in India. But the fact is each of such expectations will cost you in one way or another way. Few knowingly and another few unknowingly. Hence, beware of jumping into such investment which offers you Guaranteed, Tax-Free, and Safe Investment in India.