The cut in the bank rate has taken a toll on returns in fixed income instruments. Already there is talk of Reserve Bank of India (RBI) lowering the rate on its relief bonds. Fixed deposit (FDs) rates of several bluechip companies have witnessed a cut. Insurance companies have also taken the cue and will soon lower rates on their assured return products.
Reports in some of the leading business dailies indicate that insurance companies are feeling the heat in face of the RBI rate cut and will lower the assured rate on their products. Mr N. C. Sharma, managing director – Life Insurance Corporation, confessed that LIC would have to rationalise the rate of returns within a month. The schemes most likely to see a reduction in their assured rates include Bima Nivesh and some pension schemes (Jeevan Suraksha, Jeevan Dhara and Jeevan Akshay).
Should LIC actually go ahead with a reduction in the assured return rate on Bima Nivesh, then it will be the second time in less than 6 months that it will have done so. The first series of Bima Nivesh was issued at 10.5% assured rate, the second one at 9.3% and LIC plans to lower even this rate to below 9.3%. Earlier LIC had lowered the rate on Jeevan Shree, an endowment plan, as the previous rate was a little too good to be true in this economic scenario when the Ministry of Finance and the RBI have shown a commitment to pursue a lower interest rate regime.
Apart from LIC even private insurers are facing the heat in this interest rate regime, where the RBI is determined to adopt a cheap money policy. Not so long ago, a leading private insurer, lowered the assured rate on its single premium policy, that too, within a few months of entering the insurance sector. That was before the rate cuts, post-rate cuts it remains to be seen how may more will cut rates on their assured return products.
Apart from insurance companies, even the government has had to do a rethink on the existing rate of its small saving schemes like NSC (National Saving Certificates) and PPF (Public Provident Fund). The government in all likelihood will effect a cut on all these schemes as the existing rate is too unrealistic. The government could even do away with all small saving schemes like NSC altogether, as was the recommendation of the Y. V. Reddy committee.
The unmistakable fact one can draw from the developments outlined above is that assured returns may not be assured for too long and certainly not at the existing rates. As the Indian economy endeavours to assume the character of developed economy from that of a developing economy, this is a transition that investors will witness for some time. In developed economies, assured return investments are rare, if at all, simply because they are unviable over a period of time. Even in India, such investments may finally be phased out gradually or at least be offered at a floating rate, which is one of the options being considered by the government for NSC and PPF.
So what does all this mean for the investor? Investors need to be more cautious and review assured return products before taking the plunge. The future of these products as is evident is not too bright. There is no guarantee that the company will be able to maintain the rate and there is nothing stopping the company from lowering the rate if the economics do not permit them to maintain the existing rate.
Investors have to widen their perspective and review with an open mind other products that are not necessarily assured but are far more realistic and even rewarding in terms of returns. For instance, HDFC Standard Life Insurance does not offer assured returns, but last fortnight it declared a bonus of 9.25% on a 30-year endowment, which is far higher than what LIC has been offering under its assured return policies. So assured returns don’t necessarily make great investments. On the contrary, investors could well be forfeiting an even greater investment opportunity by snubbing unassured-return products.
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