The Hindu Business Line : A good mix ‘n’ match option

I decided to drop in at a friend’s house on a cool Sunday morning. As I entered her house, I heard a heated argument going on between my friend and her brother. The argument was over this question: what would be the value of an investment, at the age of 60, if two people of different age groups started investing now.

To illustrate: Anu, aged 25, starts to invest a sum of Rs 5,000 monthly and continues to do so for the next 10 years, Her total contribution is 6 lakh. Her colleague, Ashmita, starts to invest, at the age of 35, a sum of Rs 5,000 for the next 25 years. Now, whose corpus would be larger at the age of 60 if both the investments earn the same interest rate of 15 per cent?

When the duo saw me, they drew me into the argument, looking to me to solve the puzzle. After thinking the matter over, I came up with the numbers — Anu will have a corpus of Rs 4.6 crore and Ashmita Rs1.5 crore. They could not believe it when I told them about the magic of compounding. Also, compounding works really well if you start early as you can create a corpus without feeling the heat.

This is how any investment plan with a regular contribution and an early start works.

Let us now take a look at Bajaj’s recently launched retirement product, Future Income Generator (FIG).

Salient Features

Policyholders can adopt their own investment strategy by choosing from six investment funds with different objectives to suit their risk profile. The product also offers the flexibility to switch funds or invest in newly introduced schemes.

FIG is a unique asset allocation pension fund where managers monitor the mix of assets in the fund and manage the mix depending on market conditions so as to maximise return.

If policyholders want to manage the mix of assets on their own, the fund offers a choice of five funds to choose from, with total flexibility to switch money from one fund to the other.

The policy will continue to participate in the investment performance of the fund even if premium is unpaid for three full years.

Policyholders can choose a pure pension plan (plan option A) or a pension with life cover (plan option B). There are four additional rider benefits to choose from to further enhance risk cover (for plan B during deferment period).

The scheme offers loyalty units to enhance your fund value every year from the sixth policy year. There is also an option to pay unlimited top-up premiums anytime during the tenure of the policy to further enhance savings.

Flexibility to increase or decrease your regular premium, switching between funds, changing the premium apportionment and the premium payment mode are other advantages.

Asset allocation: Based on the risk profile, an individual can select any of these — Asset allocation pension fund (high risk), liquid pension fund (low risk), bond fund (moderate), equity growth fund (very high risk), equity index pension fund (high risk), and accelerator mid cap fund pension fund (very high risk).

Premium allocation charge: For annual premium of Rs 6,000-99,900 the charge will be 20 per cent (balance will be invested) in the first year, 5 per cent between two and ten years, and free of charge from the eleventh year.

Policy administration charge: Rs 600 per annum inflating at 5 per cent on the first day of every April will be deducted at each monthly anniversary by cancellation of units. This charge is subject to revision.

Fund management charge: Equity growth pension fund will be 1.75 per cent per annum of the NAV while 0.95 per cent will be charged for bond and liquid pension fund.

Comment: It is more prudent to de-link insurance and savings. If one’s objective is to cover risk it would be better to take the term assurance route. If one opts for risk cover of Rs 10 lakh, the risk premium (risk premium is the amount deducted from your contribution as charges for the risk undertaken by the company) at the age of 20 will be Rs 1,120 per annum. The same cover, at the age of 50, will require a higher risk premium of Rs 6,080 per annum, thus leaving a relatively lesser corpus towards investment.

(This column is intended to acquaint investors with features of new insurance products and is not a recommendation to invest. Investors are advised to compare each product with similar ones already available before making a decision).

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