Pick the right goal-based product

The ‘assured pension’ schemes from life insurers and ‘child plans’ from mutual funds are some examples of financial products that are marketed with a clear goal in mind by companies.

They know that building a pension nest-egg, or creating a large enough corpus for your child’s marriage and education is a top priority for many middle-class families. Yet, these ‘packaged’ plans that come with an emotional appeal should not be bought just based on face-value, says experts.

The fact is many of us don’t have a financial plan. When we realise that we need to achieve some goals like having a pension of at least Rs 50,000 per month after 60, or getting daughters admission in a top-class foreign university costing Rs 40-50 lakh, there is an understandable mad scramble.

“For people who don’t plan, these packaged products are still an improvement. But for those who are cognisant of our goals, it’s important to find out whether a pension plan or child benefit product suits your individual needs or not. Packaged products are sometimes costlier than what it would normally take to achieve the same goal,” Suresh Sadagopan, founder, Ladder7 Financial Advisories told DNA Money.

For instance, a pension plan with a life insurance company invests money in some funds.

“If there is under-performance, can you switch easily in those funds? An insurer will likely have 3-4 funds. There will also be switching costs. What happens to your goal if the funds under-perform? How much do you lose if you surrender? The answers to such questions need to be known before you buy an ‘assured pension’ plan,” says Jaideep Saha, a financial advisor.

In the case of child plans in the mutual fund space, there are some disadvantages too. While the premise of such funds are good because they help you build a corpus over the long-term, experts say one must look out for things like exit loads and smart asset allocation.

“When you are investing for 15-20 years horizon, the logic should be to invest more in equities and less in fixed income. As the goal date comes closer, the allocation should change in favour of debt and less towards stocks. Also, look at exit loads of child plans. Some have as high as 3% loads or no exit before a pre-determined time like 3 years. This means it can be costly to come out,” says Anil Rego, chief executive office and Founder, Right Horizons.

Experts believe that investors/savers should consider three additional important points before buying a goal-based product. Firstly, the tax treatment of the corpus once it comes to your hands.

You may get a tax-break for investments, but at withdrawal stage the income could be taxed.

Secondly, the amount it would it take to replicate the product’s outcomes with other alternatives. For instance, an insurance-cum-investment plan can be broken down into a cheaper term insurance, and investing significant portion into public provident fund, mutual funds, government schemes and even bank deposits.

“Lastly, when you have a proper plan, all short term and long term goals become clear and so do the solutions to achieve them. The Do-It-Yourself investment mantra is okay, but only a handful can make a 360-degree financial plan. That’s why they end up focusing on 1 or 2 goals, and become ignorant of others,” adds Sadagopan.

CAUTIOUS PLAN

1. When we realise that we need to have a pension of at least Rs 50,000 per month after 60, or getting daughters admission in a top-class foreign university costing Rs 40-50 lakh, there is an understandable mad scramble
    
2. In case of child plans in the mutual fund space, there are some disadvantages too
    
3. While the premise of such funds are good, experts say one must look out for things like exit loads and smart asset allocation