Say NO to Packaged Financial Products

Published: November 30, 2015 at 11:28 am

Last Updated on December 30, 2015 at 11:46 am

This cyber Monday (30th Nov. 2015)  or if you prefer, Buy Nothing Day (Nov. 27th 2015 or Black Friday)  resolve to say NO to packaged financial products.  There is no need for a pension plan or a child’s education mutual fund or a child’s gift fund (like the one from Axis where one has to  invest only in the child’s name. Bad idea- Why you should not invest in your child’s name!)

We all like solved problems. Right from school, when faced with a question, many of tend to search for an ‘example problem’, so that we know how to proceed.  When it comes to personal finance, solved problems or ready-made financial products packaged for a specific need can be disastrous.

Some examples are the pension plan and child plan  offered by insurers and mutual fund houses.  Now Cafemutual reports that many more retirement linked mutual funds are on the anvil. During the PPFAS unitholders meet, Rajeev Thakkar mentioned that such plans might replace ELSSS mutual funds.

If that happens, use such plans only until you need tax breaks (I am assuming that returns from such funds would beat PPF after tax). Choose one with the lowest expense ratio since some of these funds could have an insurance component linked to them.   So best to choose one without  add-ons.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Want to hear a quote that makes little sense? (from above Cafemutual report – not online anymore)

Sharing the rationale behind offering an insurance cover with the retirement plan, (Dinesh) Khara (CEO SBI mutual) told Cafemutual that it will help investors to save for retirement along with protecting their life. “We want to provide one-stop solution through our retirement plan. We have observed that many investors want to save for retirement but due to other preferences like life insurance they delay investing for the retirement.”

Duh! Most people don’t delay investing for retirement. They just take the easy route and buy dud pension plans offered by insurers (incl SBI life!).

But why? Why should one say no to packaged financial products?

The first step required is a change in mindset

  •  To quote Subra, “from saving for retirement, people should start investing for retirement”
  • Inflation should be recognised as the enemy but also the benchmark for all long-term goals and not just retirement.
  • The concept of a pension or an annuity should be eradicated from the mindsets of young investors far away from retirement. Since inflation is the enemy, a constant income in retirement is the very last thing you need in retirement

Next ask the following question:

What is the post-tax return I am likely to get from these pension plans? For the amount that I can invest each month for retirement, is that return enough to get me a large enough corpus. Large enough corpus here means, large enough to generate an income that can be increased at a rate equal to the prevailing inflation.

None of the pension plans offered by insurers can do this.  Don’t expect the mutual fund plans to be very different.

In any case, you cannot create wealth (have enough for retirement plus a little extra) with any pension plan.  SEBI will most likely limit the exposure in these funds and my guess is that they would resemble debt-oriented balanced funds. Don’t think the gains would be tax free like the insurance product.  I think they should be taxed like debt funds (good news for me as my mandatory NPS could also be treated similarly).

A packaged product sold as a tailor-made solution is likely to have a lock-in and exit-load.

The question to ask is, why buy something off the shelf when you make a better product on your own. Subra has a wonderful name for it: the retirement basket.

Put together an aggressive  basket that is filled with a productive and liquid asset: equity. You can use the corpus when you want (early retirement or a dire need), and how you want: generate an inflation-proof income with part of it, while the rest grows at a decent pace.

The same arguments – liquidity and flexibility – work for long-term goals like our children’s education. Some people invest in plans in which the money is locked in until the child is 18, forgetting that their child might graduate from school at age 17!

Let us resolve to stay away from all packaged financial products forever.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)