Before you start investing in a financial product, it is very important for you to consider the following points:
Inflation rate :
Considering the current inflation rate which is hovering above 9%, you should consider the rate of return of your financial asset to be more than 9%. For example, what you could buy for Rs. 100 a year back now costs Rs. 109, but your investments have returned only around Rs. 106, giving a negative return of Rs. 3.
The main reason that has been sighted for this poor performance by mutual funds and fixed deposits by banks is because most financial institutions prefer to invest their investor’s capital in bonds. Bonds, on the other hand, react inversely to the interest rates movement. With the increase in the policy rates by 100 basis points by the RBI, the bonds’ performance has suffered. Most capital protection funds invest a part of their corpus in equities, which have hardly provided a good return lately.
In such situations, investors are advised to stick on to these investments as they are proved to perform better in the in a long term scenario. Exiting from such investments before the maturity period, will increase your expense as you will be required to pay a penalty, thereby, drastically reducing the value of your returns.
Terms and conditions:
Although, getting the premium amount on maturity was guaranteed, the capital guarantee in the form of the highest NAV, caught the attention of the investors. The entire misconception up to a certain extent can be changed just be reading the fine print.
In a bullish market, you will get guaranteed returns at the highest NAV of an equity fund. But, in the downside, to protect your upside in a volatile market, the insurer will lock in your gains in debt options. If the markets continue to fall, the insurer will shift more and more into debt, which gets reflected in your NAV.
Cost of the fund:
This feature is beyond the purview of the regulatory authorities as to how much of the insurer can charge you. Factors such as your age, the sum assured you choose and the charge for the guarantee, the advantage of a capital guarantee can actually turn against you.
What you should know :
There is no point of investing with the aim of creating a good financial corpus, if you are forced to take a personal loan or a home loan in future just because you ignored the inflation rate to the rate of return.
If you are a risk averse investor, and are in the lowest tax bracket, it is better you choose to invest your funds in Fixed Deposits, Public Provident Funds and Commercial funds. You can easily earn around 9.5-10% in fixed maturity plans.
But if you are willing to take the risk, the investing in equities for a minimum period of 10 years can definitely guarantee you a good corpus for your future. In the long-term, equities tend to be less volatile and give returns that leave inflation behind by a comfortable margin.