Absolute amounts can be misleading

A client (around 51 years age) walked into my office along with his 26-year-old daughter who had recently secured a job at a prestigious MNC. Both father & daughter were understandably very happy.

I learnt that there was another reason for their happiness! My client excitedly informed me that he has finalised a long-term investment for his daughter which is the best investment he has ever come across. Before I could congratulate him, he pulled out a sheet of paper with the following matter hand-written on it:

  • Age: 26 years
  • Payment Term: 35 years
  • Annual Premium: Rs. 13,225
  • Life Insurance: Rs. 5,00,000
  • Cumulative amount at end of payment term: Rs. 23,45,000
  • Annual Pension: Rs. 1,77,165

His excitement about the plan came from the fact that an yearly investment of only Rs. 13,225 would give his daughter an assured pension of Rs. 1,77,000 throughout her life after she crosses 60 years age.

Seems lucrative right? 

An yearly investment of only Rs. 13,225 leading to an assured pension of Rs. 1,77,000 throughout life after crossing 60 years of age!!

If you should use the IRR calculation, you might be surprised to find that the annualised return of this “lucrative” plan is a measly 7.8% p.a.!

Do not get swayed by the absolute amounts without understanding the time value of money. It is always advisable to use the IRR calculation for any such Guaranteed returns plan.

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