SACHIN, 23, is a graduate, and working with an international call centre. He earns a handsome salary of Rs 25,000 per month. His father, 45, is self-employed; mother, 42, is a housewife. Sachin has a younger sister, 18, studying in second year junior college. Sachin's family want to get their daughter married after she completes her graduation - that is another three years away. They did some calculation and decided they will require Rs 2.5 lakh for the marriage. Sachin works in shifts. So, he hardly has any time to plan his finances, and that is the reason he invest his money into tax saving instruments without realising whether he needs the product or not. Sachin visited his bank to make a Fixed Deposit of Rs 70,000 to save for his sister’s marriage. However, the bank was aggressively promoting bank assurance products. So, when Sachin met the investment advisors of the bank for a fixed deposit, they convinced him to go for Unit Linked Insurance Policies (ULIPs) instead. They told him if he invests Rs 70,000 for next 3 years, he’ll get returns as high as 20 per cent for a year. Sachin went ahead and invested his money, but after the completion of 3 years of the ULIP policy, he received less than his original investment of Rs 210,000. Also read: Buy home, car and financial freedom
Analysing the situation
What went wrong? Well, Sachin bought a long-term product (ULIP) for a short-term goal (sister’s marriage). The result was Sachin made a loss on his investment, since he had to withdraw money (surrender the ULIP policy) for his sister’s marriage without giving his investments time to give him favourable return.
Analysis of Sachin's investment in the ULIP policy
The surrender value of Sachin’s ULIP investment was Rs 168,688. This amount is insufficient for the marriage of Sachin’s sister.
Read more: Should you close your ULIP policy? Constructing an investment portfolio
What Sachin should have done instead of going for ULIPs, was to build a portfolio of debt and equity in the ratio depending on his risk appetite. He could have invested in equity diversified scheme or balanced scheme of mutual funds which could have helped him to generate at least 12 per cent return. While in debt, he could have invested in a bank flexi deposit for next 3 years. This would help Sachin to generate a return of 8 per cent per annum. Assuming Equity: Debt ratio 60: 40
If he had done as illustrated above, the maturity value of his investment would have been Rs 256,902. Sachin would have made a profit of Rs 46,902 and also accumulated Rs 2.5 lakh required for his sister’s marriage. Conclusion: Who can help Sachin?
Ideally, Sachin needs to take care of his own investments. He should read and understand all the information given in the investment document before he signs the contract. In case, he does not have sufficient time to do the same, he should appoint a qualified financial consultant to help him achieve his dream goals.
Analysing the situation
What went wrong? Well, Sachin bought a long-term product (ULIP) for a short-term goal (sister’s marriage). The result was Sachin made a loss on his investment, since he had to withdraw money (surrender the ULIP policy) for his sister’s marriage without giving his investments time to give him favourable return.
Analysis of Sachin's investment in the ULIP policy
| Year
| Amount invested by Sachin | Charges on ULIP policy | Actual amount invested in the fund | Return | Fund Value at the end of three years |
| 1 | Rs 70,000 | 80%, ie Rs 56,000 | Rs 14,000 | 12 | Rs 19,668.99 |
| 2 | Rs 70,000 | 5 %, ie Rs 7,000 | Rs 66,500 | 12 | Rs 83,417.60 |
| 3 | Rs 70,000 | 5 %, ie Rs 7,000 | Rs 66,500 | 12 | Rs 74,480.00 |
| Total Fund Value (in Rs) | Rs 177,566.59 | ||||
| Surrender charges (in Rs) | 5 % on fund value | ||||
| Fund value paid to Sachin (in %) | Rs 168,688.26 |
The surrender value of Sachin’s ULIP investment was Rs 168,688. This amount is insufficient for the marriage of Sachin’s sister.
Read more: Should you close your ULIP policy? Constructing an investment portfolio
What Sachin should have done instead of going for ULIPs, was to build a portfolio of debt and equity in the ratio depending on his risk appetite. He could have invested in equity diversified scheme or balanced scheme of mutual funds which could have helped him to generate at least 12 per cent return. While in debt, he could have invested in a bank flexi deposit for next 3 years. This would help Sachin to generate a return of 8 per cent per annum. Assuming Equity: Debt ratio 60: 40
| Year | Investment Amount (Rs) | Return on Investment | Fund value at the end of 3 years (Rs) | |||
| Equity | Debt | Equity | Debt | Equity | Debt | |
| 1 | 42,000 | 28,000 | 12% | 8% | 59,006.98 | 35,271.94 |
| 2 | 42,000 | 28,000 | 12% | 8% | 52,684.80 | 32,659.20 |
| 3 | 42,000 | 28,000 | 12% | 8% | 47,040.00 | 30,240.00 |
| Fund Value (Rs) | 158,731.78 | 98,171.14 | ||||
| Total Fund Value (Rs) | 256,902.91 | |||||
If he had done as illustrated above, the maturity value of his investment would have been Rs 256,902. Sachin would have made a profit of Rs 46,902 and also accumulated Rs 2.5 lakh required for his sister’s marriage. Conclusion: Who can help Sachin?
Ideally, Sachin needs to take care of his own investments. He should read and understand all the information given in the investment document before he signs the contract. In case, he does not have sufficient time to do the same, he should appoint a qualified financial consultant to help him achieve his dream goals.
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