What Not To Do With Rs 10 Lacs

I have just come back from a trip to my hometown and this is the reason I could not update the site for last few days.

During my stay at home, something interesting happened when I had to accompany a family member to the Aadhar Card registration center. Registrations take place at many places like ones nominated as permanent centers by the government, ones which are temporary in nature and others which are set up in partnership with private companies operating in technology and financial domain and having existing branches at suitable locations.

The center which I visited was setup in partnership with a well known private company which is involved in share trading and financial services. One section of the office was dedicated for Aadhar registration and rest for normal trading and financial services related operations.

I was waiting for our turn when I heard 2 employees of this private company trying to convince a middle aged guy about the merits of investing for long term. Being a self-confessed long term investor, I was naturally attracted towards their discussion and decided to overhear them for a while.

The two salesmen were pitching a product to this guy with following simple claim:
Pay Rs 10 Lacs today (in 2014) and you will start receiving an assured income of Rs 1.5 Lacs every year from 2024 onwards till the time you die.

Simple and easy…

The potential customer seemed attracted to the simplicity of the statement and big numbers and claims of ‘assured income’ and started asking what(s), how(s) and when(s) about the scheme and the company which was managing the scheme.

Now both salesmen took this person away in one corner of the room (picture below) and (probably) started showing him vivid presentations about the potential riches which this 10 Lac – 1.5 Lac scheme had to offer.

Policy Agent Fool Investors
Salesmen Explaining the Benefits of Product/Scheme to the Customer
I am not sure what more these guys might have told him… but after about half an hour, I saw these men shaking hands with the customer and appreciating him for his wise and quick decision.

Now I don’t know what this product (or scheme) was, nor did I make any effort to enquire about it. So, in case I get my assumptions and calculations wrong in rest of the post, please correct me by posting a comment. I will promptly correct the post to reflect changes.

So lets see…

Suppose you are the customer being persuaded by these salesmen…

But instead of buying this product, you decide to put Rs 10 Lacs in fixed deposits for 5 years. I checked a few bank websites and found that 5 year deposit rates are close to 9.00% per year.

Now the scheme/product offered by the people promises Rs 1.5 Lacs every year after 10th year.

So what would you get if you decided to put your money in Fixed Deposit for 10 years (two back-to-back 5 year terms)?

I did some basic calculations as depicted below:
10 Year Fixed Deposit Return

As evident from above calculations, using something as simple as 5-Year Fixed Bank Deposits, one can earn more ‘assured’ yearly income than that being promised by the scheme which these 2 salesmen were selling.

And I have not even considered the tax savings which you get from putting your money in 5-Year FDs. Assuming your only contribution to Section 80C is through these FDs, a sum of Rs 1.5 Lacs would be eligible for income tax exemption.

Now, a sum of Rs 40,000 yearly (difference in yearly incomes from above two scenarios) may not be much for a lot of people. And probably this difference would reduce further when we have more information about the product and are more realistic about our assumptions.

But the point which I am trying to drive home is that sometimes the facts are clearly in front of our eyes (in form of simple numbers) and we do not see them because of our ignorance.

But a little common sense and a sensible approach (which atleast questions the motives of people selling financial products, claiming ‘assured’ returns) can go a long way in creating long term wealth.

There may be other such assured returns kind of schemes which your so-called financial well-wishers might ask you to consider. But remember, its your hard earned money and not theirs. It is entirely upto you whether you really understand the scheme/product or are just blindly taking some action for sake of taking action (and showing off that you care and more importantly, understand about long term investing).