Addressing Your Retirement Goal – HDFC Sanchay plus Vs Balanced Advantage Category in Mutual Funds

This insurance plan from HDFC Life stable has caught people’s fancy of late.

I am making an attempt to decode this plan for the benefit of all my investors & compare it with Balanced Advantage Category plans of Mutual Funds, to address their retirement needs

What is HDFC Sanchay Plus?

This plan is a “non-participating” “non linked” “traditional savings” life insurance product offering deferred payouts to you (i.e. maturity value is paid over a period of time). In simple English it means that the payouts, made at a later stage of your life, are guaranteed and unlike a plan which offers “bonuses””, there is risk associated of the insurer not paying you if it doesn’t make profits. You are committed upfront what you are getting into and what you will get during the payout / distribution period. In that sense, it can be compared to an annuity plan

Death Benefit

In case of death of Life Assured during the policy term, the death benefit equal to Sum Assured on Death shall be payable to the nominee.

Sum Assured on Death is the highest of:

10 times the Annualized Premium, or

105% of Total Premiums paid, or

Premiums paid accumulated at an interest of 5% p.a. compounded annually, or

Guaranteed Sum Assured on Maturity, or

An absolute amount assured to be paid on death, which is equal to the sum assured.

Sum Assured shall be equal to the applicable Death Benefit Multiple times the Annualized Premium. The applicable Death Benefit Multiples are between 10x to 15x depending on age. Upon the payment of the death benefit, the policy terminates and no further benefits are payable.

Guaranteed Maturity Option – This option offers guaranteed benefit payable as a lump sum on maturity.

Maturity Benefit – The maturity benefit is equal to Guaranteed Sum Assured on Maturity plus accrued Guaranteed Additions. Where, Guaranteed Sum Assured on Maturity is the total Annualized Premium payable under the policy during the premium payment term.

Life-Long Income Option – This option offers maturity benefit in the form of Guaranteed Regular Income up to the age of 99 years and the return of total premiums paid at the end of the pay-out period.

Please note – If the policyholder dies during the Pay-out Period, then the nominee shall continue receiving Guaranteed Income as per Income Payout Frequency & benefit option chosen till the end of Pay-out Period. Guaranteed Sum Assured on Maturity shall be the present value of future pay-outs, discounted at a rate of 8% p.a.

Total premiums paid are returned at the end of the Pay-out period, irrespective of survival of the policyholder during the Pay-out Period.

Rider Options

Rider option is also available in the policy, so as to enhance the protection of the policyholder.

Review

Death benefit: Grossly Inadequate

The death benefit (the life insurance cover) you can expect from this plan is based on your age. Without getting into confusing details of how it is arrived at, Sanchay Plus fetches you a life cover of between 10 to 15 times the annual premiums that you pay. Therefore, a ₹ 1 lakh annual premium will fetch you a life cover of just ₹ 10-15 lakh which is clearly not enough to compensate your dependents for income loss.

So if getting an adequate life insurance cover in place to protect your dependents is your objective, HDFC Life Sanchay Plus is a bad choice as it offers too little by way of death benefit. A pure term plan chosen will fetch you far better bang for buck.

The Critical Illness and Accident Benefit riders that come as add-on options in Sanchay Plus are also avoidable for the same reason. When choosing your plans, be sure to opt out of these riders.

Having said this, most investors consider Sanchay Plus not for its death benefits, but for its guaranteed maturity or income payouts.

Advantages and Disadvantages of HDFC Life Sanchay Plus with Product Suitability Analysis

Overall, this is a good product for investors seeking to secure a minimum level of income without having to worry about interest rate direction, or actively managing their money. The HDFC brand lends comfort & credibility.

The product however will not meet your post-retirement income needs fully, because of fixed non-inflation adjusting payouts which will lose value over time. To complete your regular income portfolio for retirement, you will need to invest in Equity or Hybrid funds, certain government backed Post Office products and other higher return options along with this plan.

On the negative side, the income it generates won’t adjust for inflation over the years. What looks to be a large income today may seem quite inadequate 10 or 12 years down the line, factoring in inflation.

Tax laws can change. If they do, the returns from this product will turn quite unattractive. A sharp rise in market interest rates can also render this plan’s returns unattractive. Also, like most guaranteed insurance products, it is inflexible as it requires you to commit to large premium payments for several years and wait for an extended period of time, for getting returns.

While offering predictable cash flows similar to immediate annuity plans, Sanchay Plus offers tax-free income (immediate annuity plans offer taxable income), because it qualifies as an insurance scheme under the Income Tax Act owing to its life component. For investors in the 20% and 30% tax brackets a 5.4-5.7% tax free return is quite a good deal in the current context.

The long term and lifelong income plans in HDFC Sanchay Plus materially reduce the reinvestment risk that you would face with other regular income investments such as FDs or post office schemes. You lock into a single rate and a certain income for a long period and don’t have to worry about rate swings.

Minimum premium to be paid is for 2 years. The plan does allow early exit through surrender, offering you a way out if you are stuck but not at all a viable option. Looks like the trick is to make customer commit a large premium, so that it always looks a losing proposition, if one exits after the first year.

If your policy lapses & it has not acquired Guaranteed Surrender Value (GSV) all your premiums paid will become zero & no life cover would exist. No benefits are paid under “Lapsed Policy”. For your policy to attain GSV, You should have paid at least 2 years premium. This is a huge disadvantage, if years premium is 5L per year and U suddenly realise would want to exit after year 1.

If any due premium is unpaid upon the expiry of the grace period & your policy has acquired a Guaranteed Surrender Value (GSV), your policy status is altered to “Reduced Paid Up”

The maturity, death benefits & surrender value, in case of a reduced paid up policy is computed by a standard formula, as per the standard agreed insurance norms.

You can revive the policy. You get a 5 years window to revive, after the last un-paid premium date.

Lets us do the Math by doing a case study with actual numbers

Deepali ,a 45 years young head honcho of a multinational firm, wants to know which is a more viable option. HDFC Sanchay Plus or Investing in a Dynamic Asset Allocation MF product & buying a pure term plan, to address her retirement needs.

Let us evaluate for 5 L annual premium for 10 years, factoring her current age at 45 .

Participating in HDFC Sanchay Plus 5 Lakh annual premium

Age of the Person	45 years
Date of commencement of policy	Sep 16^th 2020
Yearly Premium Amount	₹ 5 Lakhs
Premium Paying Term	10 years
Sum Assured/Life Cover	₹ 55 Lakhs
Guaranteed Sum Assured	₹ 51.84 Lakhs
Maturity Date ( 11 years)	Sep 16^th 1931
Annual Guaranteed Income On Maturity	4,68,750
Guaranteed Income Payout Period	25 years
Total Guaranteed Amount Paid (16/9/32-16/9/56)-25 years	₹ 1.17 Cr
Total Return Of Premium paid after completion of policy term	₹ 50 Lakhs
Total Funds Received by the customer on the maturity of policy	*₹ 1.67 Cr*
( In 2056, when the investor is 82 years young )

Investing 5L Annually For 10 Years In Balanced Advantage Category

5 L invested every year for 10 years @ 8%	₹ 72.43 L
72.43 L @ 8%* for 25 years	₹ 4.40 Cr
( In 2056 , when the investor is 82 years young )

Buying a Life Cover by way of a Pure Term Plan

At 45 a pure life term plan of ₹1Cr would cost her an annual premium of	₹ 35,754
Total Premium paid for 37 years, till 2056 ( would be age 82 )	₹ 13.22 L
*10yr CAGR return in a Balanced Advantage Plan is between 10-13%

So in 2056, when she is 82 years young, with HDFC Sanchay Plus she will have a corpus of 1.67 Cr. In the event of her untimely death, her nominees would receive a maximum of 50 lakhs, as a death benefit.

And in the case of the Mutual Fund scheme, her corpus at the end of 2056 would be 4.4 Cr & she would have been insured for a cover of 1 Cr. More so, she can dip into this corpus, whenever she may want to, in case of any emergencies.

This liquidity is NOT available in HDFC Sanchay plus & the maximum cover payable is 50L.

Summarizing , Both the products have their inherent features, You as an investor will have to apply yourself and get to the nitty gritties, before finalizing a product. As you are addressing your retirement needs, please ensure you get adequate growth in the product you choose & ample liquidity.

July 22, 2021

TIME IN THE MARKET IS MORE IMPORTANT THAN TIMING THE MARKET

What is Market Timing?

Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ups and downs of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant. Market timing is an investment strategy that involves going in and out of the market or switching asset classes based on predictions that attempt to measure how to market will move. The problem with this method is that it’s nearly impossible to accurately time the market even by successful Fund Managers across the world.

Market timing has its Disadvantages

One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months. Due to some quirk in human nature, we tend to be overconfident in our ability to predict the future. So we end up timing the market. Or at least trying to.

Mutual funds investors frequently try to time their systematic investments in response to the market’s ups and downs. When the market is falling, they stop their SIPs. When it is rising, they increase their SIP amounts. This invariably backfires.

The opposite of market timing is buying and holding as the market goes through its cycles.

Market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It’s true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.

Time is Investor’s Best Friend

Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial advisor can help you determine which investments may be right for you.

Patience while Investing Pays BIG TIME!

Investors have been in tough situations in the past, the event that is still fresh in our memory being the 2008-09 Global Financial Crisis (GFC), where markets saw a flip flop ride initially which was finally followed by a swift recovery over medium to long term. Investors who tried to time the market during the crisis would have most likely repented while a patient investor who ignored the noise and remained invested would certainly be counting his fortunes today.

The below table shows the Systematic Investment Plan (SIP) of Rs 10,000 per month since 1st April 1998 in the NIFTY 50 Index and their market values during the 2008-09 GFC and after 5 and 10 years.

Date	Remarks	Total Months	Total Investment	Market Value(In Lakhs)
Sep 2007	1 Year before Global Financial Crisis	114	11.4	39.84
Sep 2008	Global Financial Crisis	126	12.6	32.06
Sep 2013	5 Years after Global Financial Crisis	186	18.6	53.98
Sep 2018	10 Years after Global Financial Crisis	246	24.6	110.74

As can be seen from the above table, the market value of SIP decreased from Rs 39.84 lakh to 32.06 lakh during the Global Financial Crisis. However, someone who would have continued their SIPs would have seen their wealth grow to Rs 53.98 lakh as of September 2013 (after 5 years of the GFC crisis) and Rs 110.74 lakh as of September 2018 (after 10 years of the GFC Crisis).

Since Last Year we were in a similar situation where the market value of SIP investment which was started 10 years (SIP of Rs 10,000 per month since 1st April 2010 in NIFTY 50 Index) back has seen a fall due to the outbreak of the pandemic and then we are witnessing Market upsurge and Long Term Visibility Looks Very Good in terms of Wealth Creation.

Date	Remarks	Total Months	Total Investment	Market Value(In Lakhs)
March 2019	1 Year Prior to COVID 19 Crisis	108	10.8	17.9
March 2020	COVID 19	120	12	14.07
March 2025	5 Year After COVID 19 Crisis	180	18	??
March 2030	10 Year After COVID 19 Crisis	240	24	??

Investors’ behavior becomes important during such times Like GFC, COVID 19, etc as emotions are at a greater play in situations when there is heightened volatility. Investors ‘Greed’ to chase returns and ‘Fear’ to stay away from falling markets usually keeps them at bay during tough times. The result is that the investor ends up sitting at the fence for a long time patiently investing to capture the right opportunity and multifold compounding returns.

TIME is a superpower. It works well even for the most Unlucky investor!

Let’s consider One investor invested only at the wrong time(invested just before any Major Market Fall). He didn’t take his money out after that and withstood all the future declines without panicking out.

This simple but difficult act of patience gave the portfolio a long enough time horizon to let compounding work its magic. While there is a natural tendency to shrug this off given the simplicity of the solution, here is some hard-hitting evidence.

Check out the returns of lumpsum investments in Nifty 50 TRI till date when invested right before the major falls of the past two decades.

Major Fall >20% Since 2000	Absolute Decline	Nifty 50 TRI Lumpsum CAGR(When invested at Peak Just Before the Fall)	Debt	Inflation
2000 Dotcom Bubble	-50.00%	12.00%	8.00%	6.00%
2004 Indian Election Uncertainty-30%	-30.00%	14.00%	7.00%	6.00%
2006 Global Rate Hike Sell-Off	-30.00%	11.00%	8.00%	7.00%
2008 Global Financial Crisis	-59.00%	8.00%	8.00%	7.00%
2010 European Debt Crisis	-27.00%	10.00%	8.00%	7.00%
2015 Global Market Sell-Off(Yuan Devaluation)	-22.00%	11.00%	8.00%	4.00%
2020 Covid Crash	-38.00%	19.00%	8.00%	4.00%

Summing it up

1-As seen above with the help of time even the most unlucky investor ended up with a reasonable outcome outperforming debt funds and inflation.

2-A simple SIP removes the need to time the markets and if given enough time provides a return that is almost as good as the hypothetical lucky market timer (who is difficult to exist in reality)!

3-If you have a long time horizon, a simple SIP in a few good equity funds for the next 10-15 years is all it takes to ensure a good investment outcome.

Do not let the inherent simplicity of the solution, undermine its ability to deliver the magic of compounding.

June 14, 2021October 18, 2021

HARNESS THE POWER OF COMPOUNDING AND RUPEE COST AVERAGING USING SIP

SIP is an option designed by mutual funds, allowing you to invest a small sum in the stock market on a regular basis. The main advantage of a SIP is that it averages out your cost in the long run as an investor gets more units when the markets are down.

The periodicity of a SIP can be determined by one’s cash flow and can be increased with a rise in income or addition of financial goals. In brief, a SIP helps you grow even a small investment into a large corpus, thanks to the power of compounding. The trick is to start early.

SIP is better as it averages out the purchase cost rather than lock up the money at a particular NAV as in lump sum investments.

Advantages of SIP:

Power of Compounding
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein.
To avail the benefit of power of compounding one has to start early and invest regularly. At an early stage, a less investment is needed and your money gets more time to grow whereas more investment is needed at a later stage to accumulate the same planned corpus.

The concept of compounding is simple. Power of compounding is nothing but interest earned on interest or profits earned on profits. The power of compounding over a long horizon, if invested in the right asset, is enormous. From a wealth creation stand point, time is the most important factor in investing, much more important than factors like market levels, valuations (PE ratios), current economic and political scenarios etc. Example
If you invested Rs. 1,000/- in an instrument giving 10% return in a year. At the end of year 1, value will go to Rs. 1,100 and in year 2 you will earn return on Rs. 1,100 and not on original investment of Rs. 1,000/-.

Rupee Cost Averaging:
It means averaging the cost price of your investments.
SIP helps in averaging the cost as equal amount is invested regularly every month at different NAVs. When markets are down you get more number of units and when the markets are up you get less number of units. Hence, over all the prices gets averaged out.

Rs 5 Lakhs invested for 5 years at an annualized return of 12% will yield a corpus of Rs 3.8 Lakhs. The same money spread over 20 years at a monthly instalment of just Rs 2,080 will yield a corpus of Rs 24 Lakhs. You do not need a sufficiently large investible corpus to create wealth, investing from your regular monthly savings, even if it is a small amount can help you create substantial wealth. This is the essence of systematic investments. The power of systematic investment is unlocked through compounding and the key to its success is discipline. Mutual fund Systematic Investment Plans or SIPs is a proven way to create long term wealth from your regular monthly savings.

SOME MYTHS RELATED TO MUTUAL FUND INVESTING VIA SIP

Myth-SIP works only for Equity funds because it takes advantage of volatility through Rupee Cost Averaging.

Fact- Remember the essence of SIP is the power of compounding; rupee cost averaging is an auxiliary benefit. SIP advantage works same for Debt Funds also. Debt as an asset class also brings volatility which can be enjoyed by you using SIP rupee cost averaging.

As Per Asset Allocation and Risk apetite even Debt can be advised for Long Term. SIP in Debt Funds works really good for long term using the same advantages of SIP. Indians by nature traditionally have used RD as Systematic Tool under Fixed Income Bucket.

Myth –Do not Invest when the markets are low, it will cause a Loss

Fact – Invest when markets are down and get more units at a discounted NAV

Many People believe in this myth and it still prevails today. But the fact is, when the market is down ,you get more units at a discounted value .This extra units will be useful when the market goes up again .this is known as rupee cost averaging, SIP provides this benefits, it buys more units when markets are down, buys less units when markets are up.

EXAMPLES OF POWER OF COMPOUNDING

If You invest Rs 8000 in a fund with an assumed rate of return from the fund 12%

From the above table , we can see that the opening balance principal + interest on that return gets calculated and so on. It is something like 1 becomes 2 becomes 4 become 8 and so on ….

As we said it is the Time spent in the market creates enormous wealth rather Timing the market not an right option. You can check Fund Value growth rate after 5/10/15/20 years.

Month

Opening Balance (Rs.)

SIP amount (Rs.)

Assumed Return@ 12% p.a.(1% p.m)

8000

80/-

8080/-

8000

160.8/-

16240.8

8000

242.408/-

24483.208

8000

324.83/-

32808.038

8000

408.08/-

(Opening Balance+ Return)*Returns

Time	Fund Value
After 5 years	6,59,890.93
After 10 years	18,58,712.61
After 15 years	40,36,608.00
After 20 years	79,93,183.35 !!

Develop the habit of financial discipline using – Goal Based SIP Investing

Many Financial Planners Have coined the term – Target Investment Plan .Target Amount – Amount required for the Goal. Period-Time In Hand to achieve that goal, thereby calculating SIP Amount required p.m to get the required amount post completion of Time Period. Contact Your advisor who can assist you in telling you the Near to correct SIP amount investment required for your Financial Goals

Financial discipline is rarely something anyone is born with neither It is taught in school as any subject. We have to work on it.

Let us take the example of goal-based investing. A newbie investor may start a small SIP to invest a certain amount over 5 years to achieve a goal. However, after 18 months, this individual may be tempted to buy a new laptop and would be falling short of some amount. If this individual decides to redeem the corpus which has been created so far, he may not only lose the opportunity of creating more wealth but would also fall back on his efforts to achieve his goal. Therefore it is critical to adhere to financial discipline when it comes to investing. Starting small makes it easier to get used to this. It is worth creating a habit of putting aside a small amount.

BENEFITS OF STARTING THE SIP INVESTMENT EARLY

Name of the Person	Start Age	Retirement	No. of years invested	Amount invested per month	Total amount invested(Rs.)	12%p.a.	15%p.a.
X	25	60	35	Rs. 5000	21,00,000.00	3,24,76,345	7,43,03,225
Y	30	60	30	Rs. 5000	18,00,000.00	1,76,49,569	3,50,49,103
Z	35	60	25	Rs. 5000	15,00,000.00	94,88,175	1,64,20,368

Investor X started at age 25. His corpus at age 60 @15% p.a. is Rs. 7.43 crores approx.

Investor Y started at age 30. His corpus at age 60 @15% p.a. is lower at Rs. 3.5 crores approx.

Investor Z started at age 35. His corpus at age 60 @15% p.a. is much lower at Rs. 1.64 crores approx.

5 BASIC POINTS TO KEEP IN MIND AS KEY LEARNINGS

Start Now: You can see the cost of delay, in a mere 5 years between X and Y.

Invest long-term: Power of compounding is the 8th wonder of the world (Einstein)-The longer you invest, the more you accumulate. X invested the longest time, resulting in the biggest corpus.

Invest regularly and remain invested: Discipline is key when it comes to saving. All 3 invested Rs. 5000 every month.

Don’t be affected panicked by market volatilities: SIP’s will help average out the cost of your investments. (Rupee Cost Averaging)

Easy on the pocket: You don’t need a lumpsum -a small amount every month counts a long way.

December 8, 2019March 9, 2021

5 Reasons you need a Financial Advisor

Health is wealth. Good health is not just the absence of any illness, but complete physical and mental wellness of an individual.

In today’s world, stress affects both physical and mental health – and one contributor to stress is the state an individual’s finances.

We all have financial goals we want to reach, and savings just don’t cut it. It’s important to invest. While we invest, how do we know we’re doing the right thing for our goals?

Here’s where your financial doctor, or advisor, comes into the picture. Just like you need a doctor for your physical or mental health, you need one for your finances too.

So, how can your financial doctor help you?

Understand your financial health –Your financial advisor will work with you to assess your current financial health – your assets, liabilities, income and expenses. He/she will also consider any expected future obligations (insurance, taxes, other long-term expenses) and sources of income (pension, gifts, etc.) to get a complete picture of where you stand.
Assess your goals –Once your advisor maps out where you stand, he/she will understand your investment goals, time frame and risk appetite. An understanding of risk appetite will allow your advisor to determine your asset allocation. He/she will also assess your retirement needs at this stage. Invest now
Build the financial plan –The next stage is where your advisor charts out a comprehensive financial plan for your goals. This plan will include details such as where to invest, how much to invest, for how long to invest. He/she has the expertise to understand how all these products will work in tandem for you to achieve your goals. The plan will also look at your retirement plan, your projected withdrawal rates during retirement and have the best- and worst-case scenarios for your expected life span. If you’re already investing for your goals, your advisor will review your current habits and suggest a course of action. If you’re investing without goals in mind, your advisor will help you allocate your existing investments for your goals. Read why goal-based investing is important here. Once your plan is ready, it’s on you to implement it.
Help you understand where you’re investing –When building your financial plan, it is important to understand the products you’re investing in. The pros and cons, how it fits in your portfolio, what it can do for you – your advisor will help you with this.
Regular reviews and adjustments –It’s a good idea to revisit your investments regularly to check if you’re on track, review what you’re doing and see if you need to adjust your plan to incorporate new goals or modify/remove existing ones. Depending on your needs, your advisor will suggest changes to take you closer to your goals.

Financial advisors are the doctors you need for your financial health. With their expertise, you can get the best out of your investments.

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Tag: Mutual Funds

Addressing Your Retirement Goal – HDFC Sanchay plus Vs Balanced Advantage Category in Mutual Funds

TIME IN THE MARKET IS MORE IMPORTANT THAN TIMING THE MARKET

Market timing has its Disadvantages

Time is Investor’s Best Friend

Patience while Investing Pays BIG TIME!

TIME is a superpower. It works well even for the most Unlucky investor!

Summing it up

HARNESS THE POWER OF COMPOUNDING AND RUPEE COST AVERAGING USING SIP

5 Reasons you need a Financial Advisor

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