Safest bet!

Recently, got to see an ad in the regional channel. The advertisement goes on like this.

A small time vendor stands before an old temple tower and talks about the virtues of holding an LIC policy. Similarly another old man holding a cycle talks about the security that he gets by investing in LIC.

People appearing in this ad or those who invest blindly in LIC don't know for sure , where is their money invested.  Lets  take  an example of a  endowment policy with bonus.  how many of the investors in these policies know , where does their money go. What does  LIC do with the money and how safe is their investment?. ( I am not saying that government would let go the LIC bankrupt, that is reserved for another post)

Whenever you make an investment, you need to try and understand a few things

1) What will be my rate of return ? ( in % per annum)

2) Tax impact on the returns.

3) Where does my money go, how does this scheme  make money and how are they able to provide the returns? ( For example, If you invest in bank FD for 8%, you know that bank lends it to someone for an higher % and hence is able to provide you decent returns)

4) What is risk involved in the investment vis -a vis the investment period and the return percentage?

I am not saying that LIC is good or bad. But you should have at-least a better view of where your money is invested.

I would end this post with another story.

XX:  Do you invest in equity?

YY: ( Who's a Manager with a top notch consulting firm): No way, it's just gambling

XX: What sort of investment do you trust.

YY: We trust only in LIC for the last three generations.

XX: What is the policy that you have and what money you have made on it??

YY: hhmmmmm, Not Sure,,any how- You can have a look at the policies ( brings them in a couple of minutes)

One was an ULIP with almost 40K pa invested  for 4 years in a row and standing at a value of 80K( 50% of invested value) and others were some endowment plans with inadequate insurance coverage.

YY was surprised to know that most of his money had gone into equity and his portfolio value was actually down.!! This might have happened, even if he had invested in equity direct or through mutual funds. But, making an conscious effort to understand an investment tool and managing it would really make a difference in the long run.

Please don't  take any advertisement by face value or invest in something because someone close to you is marketing it. Go through at least the basic set of questions listed above , before you invest.