bank rate of interest and savings
Post on 25-Jan-2017
37 Views
Preview:
TRANSCRIPT
Investment Risks inpersonal finance
&LIC’s Jeevan Akshay
the logical solutionfor uncertain times
An analysis by LICof India Mumbai
Division III
The need for management offinances
▶ Due to modern lifestyles, unlike in the past where people weremainly agrarian and enjoyed the security of a joint family orcommunity system, today, people have to work, earn andalso take care of their parents and children. The focus ismore in the nuclear family and its needs.
▶ As a person passes through various stages in life the mannerin which money is created, conserved and used undergoeschange and these phases have to be understood andmanaged for a comfortable life within the society.
▶ This has given rise to a market for a variety of financialproducts where is risk is mitigated, transferred and managedto ensure continuous availability of financial resourcesthroughout the lifetime of the individual
Stages in life – Life InsuranceProducts and other savings
Young working: Age 25 to40Savings type – Term,Endowment, Money Back,Children's plans, recurringdeposits, SIPs, PO-RD etc.Less money – has to pay premiums and generate savings fromsalary or business profits after meeting living expenses
Young Age
Stages in life – Life InsuranceProducts and other savings
Middle age working: Age 40 to 55Savings type – Endowment, Moneyback, Deferred Annuity, Pension Plansand Immediate Annuity, Health Plan,recurring deposits, fixed deposits,stock market, real estate.More income – can afford to save from income or profits but also hassavings spread out in various investments. Has to take care of healthand also provide for unexpected health costs. Can now afford to thinkof retirement corpus and has to focus savings towards creating thiscorpus
Middle Age
Stages in life – Life InsuranceProducts and other savings
Nearing retirement or retired:Age 55 and aboveSavings type – Pensionproducts, Bank Deposits, HealthInsurance, Care HomeDefinitely require pension and health cover whereas there will beno income. So the planning should start early. Cost of living aswell as cost of health care will shoot up. It is said that a personwill spend almost 75% of the total amount he spends on healthcare in the last month of his life
After Retirement
What options are availablewith you?▶ 3 markets for Agents
▶ Insurance Market
▶ Savings/Investment Market
▶ Health Market
▶ But LIC agents function only in the Insurance Market
▶ Our clients save or pay money into the Savings Market and Health Market
▶ The additional income that Agents could have earned is taken by otherintermediaries
▶ When we have the right product and the backing of the strongest brand inIndia what prevents Agents from earning higher?
The Great IndianSavings Bazaar
Huge Savings & InvestmentMarket of India
Amount Spent 68.28%Amount saved GDS 31.72%
Gross Domestic Savings
Other savings 52.17%Financial savings 47.83%
Savings in LIC and itscomponents
NonSingleFYP 8.08%
Renewal 59.97%
Single 5.11%
PensionGroup 26.82%
HouseholdFinancial Savings
Bank 36.36%CompanyDeposits/PO/PF 9.09%MutualFunds/Equity/ETF 42.44%LIC 12.10%
Typicalinvestmentpatterns inIndia
Asset class Name of savingsNon Single
Insurances /Deferredannuities
Life Insurance (Non Single)Life Insurance Single premiumGSLI
Postal Life InsurancePensionFunds
Employer provided Group SuperannuationSingle premium Annuity (Akshay)
Deposits
Post Office Recurring DepositsBank Recurring DepositsPost Office Term depositsBank Fixed DepositsOther NBFC recurring DepositsOther NBFC Fixed DepositsDirect investment in bondsEmployer/Employee PF AccumulationsPublic Provident FundsGratuity (estimated)
Equity andmutual funds
Direct investment in sharesMutual funds (SIP + Lump Sum)Exchange traded (gold) fundsExchange traded real (estate) funds
Immovableand other
assets
Precious metals/jewellryReal estate (land) if purchased by youReal estate (Land and Building) if purchased by youReal estate Apartment/flats if purchased by you
Tenors Existing for Publicw.e.f. 27.04.2016
Revised For Publicw.e.f. 01.09.2016
Existing for SeniorCitizens w.e.f.
27.04.2016
Revised for SeniorCitizens w.e.f.
01.09.20167 days to 45 days 5.5 5.5 5.75 5.75
46 days to 179days 6.5 6.5 6.75 6.75
180 days to 210days 6.75 6.75 7 7
211 days to lessthan 1 year 7 7 7.25 7.25
1 year to 455 days 7.25 7.15 7.5 7.4456 days to less
than 2 years 7.5 7.25 7.75 7.5
2 years to lessthan 3 years 7.5 7.25 7.75 7.5
3 years to lessthan 5 years 7 7 7.25 7.25
5 years and up to10 years 7 7 7.25 7.25
State Bank of India – Term Deposit Rates
Historic Bank FD InterestRates
PostOfficeratesslashed
RBI cuts repo rate by25 basis points, echoesGovt’s growth roadmap
AMID easing food inflation and projections of a globalslowdown, the Reserve Bank of India (RBI) cut its key policyrate — the repo rate — by 25 basis points to 6.25 per cent,fuelling hopes of cheaper loans for home buyers andcorporates. This takes the rate to its lowest since January2011.The unanimous decision to reduce rates was taken by the newsixmember Monetary Policy Committee (MPC) under aframework agreement signed with the government, marking adecisive shift in the approach to interestrate setting in India.Earlier, the RBI governor was technically the sole arbiter of themonetary policy
The Indian Express 5 th October 2016
Longevity risk
The risk of outliving yoursavings.The living and healthexpenses keep going up.A plan like LIC’s Jeevan Akshay is one which will set yourworries to rest.
Reinvestment risk
▶ Suppose interest rates keep going down…
▶ The risk of loss from reinvesting principal at alower interest rate.
▶ In case you reinvest the monthly interestreceived at lower rates too reinvestment riskwill affect your overall savings.
▶ Risk of spending from the capital amount andcapital as well as interest depleting
▶ Once locked in at a guaranteed rate LIC’s annuity plan JeevanAkshay will last you a lifetime.
Concentration risk
▶ The risk of loss becauseyour money isconcentrated in a singleinvestment or singlecategory of assets.
▶ One part of your savings has to be in aguaranteed scheme which will last you’re alifetime like LIC’s Jeevan Akshay.
Credit risk
▶ The risk that the company thataccepted the deposit canneither pay interest nor repaythe capital.
▶ Example: Bonds having lowerrating, or NBFCs which are notstrong
▶ Under such circumstances guaranteedannuities like Jeevan Akshay from trustworthycompanies like LIC provide the only regularsource of income.
Inflation/Deflation risk
▶ The risk of a loss in your purchasing powerbecause the value of your investmentsdoes not keep up with inflation.
▶ At the same time when Inflation goesdown interest rates too go down and youwill have reinvestment risk.
▶ Under such circumstances guaranteed annuitieslike Jeevan Akshay provide the only regular sourceof income.
Horizon risk
▶ The risk that your investmenthorizon may be shortenedbecause of an unforeseenevent, for example, the loss ofyour job, disability or illness.Life Insurance is theinstrument meant for suchcontingencies.
▶ Under such circumstances buying a guaranteedannuity like Jeevan Akshay provides the onlyregular source of income because you can’tencash and spend all of it.
Call Risk
▶ The company may redeem bondsprematurely because they can affordto borrow at lower rates. Then you asthe investor will have reinvestmentrisk that you will end up investing inlower returns.
▶ LIC though it sometimes offers surrenderwhen the interest rates go down, it isentirely upon the customer to decidewhether to take up the offer or not.(Example Jeevan Dhara) Those you didnot surrender are very happy today.
Market Risk
▶ Remember the year 2008 and globalmeltdown. Almost all investmentsstarted giving very low returns.
▶ But LIC with its huge investments madein he past had a large portion of life fundinvested in higher yielding securities andwas successfully able to withstand thestorm.
▶ LIC’s Jeevan Akshay will definitely keep its promisesof the guaranteed rates it offers now so that marketrisk can be overcome.
Social/Political / legislative Risk
▶ Risk associated with the possibility ofunfavorable government action or socialchanges resulting in a loss of value is calledsocial or political risk. Because theGovernment has the power to change lawsaffecting securities, any ruling that results inadverse consequences is also known aslegislative risk.
▶ LIC due to its size is one of the fewcompanies that invests in 30 year bonds ofthe Government. Government requirescompanies like LIC to fund its on functioning.
▶ That’s the reason why LIC is able to offer amuch higher return on Jeevan Akshay than itscompetitors.
Liquidity risk
▶ The risk of being unable to sell your investment at afair price and get your money out when you want to.To sell the investment, you may need to accept alower price.
▶ Example is real estate. Try a distress sale and findout for yourself how quickly the potential buyers holdout for you to lower the prices.
▶ In real estate there is appreciation (unpredictable anddepends on external factors) but rental incomes arehardly enough to pay off housing loan installments inmost cases and increase in rent is also not possibleto the extent of inflation.
▶ Though Jeevan Akshay does not have liquidity, it has a guaranteethat lasts you a life time, so that your capital remains intact alongwith periodic installments.
Risk / Returns and Guarantees
Type of Savings Name of savingsLongevity
Risk
ReinvestmentRisk
ConcentrationRisk
CreditRisk
InflationRisk
HorizonRisk Call Risk
MarketRisk
PoliticalRisk
LiquidityRisk Returns
Banks/PO
Bank/Post OfficeReccuring/Term
deposits Yes Yes No No Yes Yes No Yes Lower NoModerate /Guaranteed
Other NBFCReccuring/Term
Deposits Yes Yes Yes Yes Yes Yes Yes Yes Yes Partial HigherPublic Sector
Bonds Yes Yes No No Yes Yes No Yes Lower Partial ModeratePrivate Sector
Bonds Yes Yes Yes Yes Yes Yes Yes Yes Yes Partial HigherPublic Provident
Funds Yes Yes No No Yes Yes No Yes Lower PartialModerate /Guaranteed
Stock Market
Direct investmentin shares Yes Yes Yes No Partial Yes No Yes Yes Partial High/Low
Mutual funds (SIP+ Lump Sum) Yes Yes Yes No Partial Yes No Yes Yes No High/Low
Exchange traded(gold) funds Yes Yes Yes No Partial Yes No Yes Yes No
Moderate /Higher
Exchange tradedreal (estate) funds Yes Yes Yes No Partial Yes No Yes Yes No
Moderate /Higher
Real estate &precious metals
Precious metals/jwellery Yes Yes Yes Yes Partial Yes Yes Yes Yes Yes Moderate
Real estate (land) No Yes Yes Yes Yes Yes Yes Yes Yes YesHigh /
Moderate
Real estate (Landand Building) No Yes Yes Yes Partial Yes Yes Yes Yes Yes
High /Moderate
Real estateApartment/flats No Yes Yes Yes Partial Yes Yes Yes Yes Yes
High /Moderate
Pension Jeevan AKshay No No No No Yes No No No Lower YesModerate /Guaranteed
So where is the road block?
▶ It is the fear to ask money from the safe (savings of the customer)
▶ We are comfortable to ask money from the income of the customer but notfrom the savings
▶ We think the customer knows where to save and that the returns elsewhereare higher. This is not so. Jeevan Akshay gives a guaranteed return which isas good as a bank return but for a lifetime.
▶ Bank rates are going to go down soon whereas Jeevan Akshay will remainguaranteed
▶ Our customers will not know about Jeevan Akshay unless we tell them
▶ We need to now convince the customer why our Jeevan Akhay is good at thismoment in time.
▶ For this we need to know what are the different types of Investment Risks.
Our products are created tooffer the same rewards forsame efforts.
▶ Minimum Sum Assured in non-singleproducts is Rs.100000/- approximatepremium Rs.6500/- and approximatecommission Rs.2000/-. This moneycomes out of pocket (annual income) ofcustomer.
▶ Minimum Premium in single premiumproduct like Jeevan Akshay isRs.100000/- and commission isRs.2000/-. This money comes out ofsafe (savings) of customer.
▶ Average sum assured of our division isRs.300000/- and commission isRs.6000/-
▶ Average premium size of Jeevan Akshayis Rs.300000/- and commission isRs.6000/-
How should an Agentapproach for Jeevan Akshay
▶ Ask ten to twenty times of the premiumyou ask under non-single plans.
▶ If you habitually sell policies where theannual premium is Rs.50000/- ask for apremium of Rs.1000000/- to the samecustomer and you have to convince himthat this savings is better than any othersavings.
▶ All customers keep money in differentsavings. Savings in Pension plan will bean additional avenue. We are not askingthat the customer give us all his savings.10% to 20% of his total savings in JeevanAkshay should be judicious.
Conclusion
▶ LIC’s Jeevan Akshay plan opens awide avenue for us to enter thesavings market
▶ It gives the Customer GuaranteedReturns so that there is no risk oflosing capital as well as interest in thereturn of corpus option.
▶ For customers who are above 80 yearsthe returns are even higher.
▶ The customers will thank you for theadvice when the rest of the interestrates go down.
Questions?
top related