Friday 25 December 2015

Learning this tool alone can save investors Lakhs!

A major reason that investors get misled into putting their hard earned money into wrong types of plans is their quest for:
High Returns - GUARANTEED

Big financial institutions - (Namely Banks & Insurance Companies) know this mindset of the average investor. They collude & offer you Guaranteed plans weaving such dreams in their sales pitch that it is easy for a gullible investor to fall prey to them.

Recently, a 41 year old businessman friend of mine was approached by his banker with following scheme from a large insurance company claiming a Return on Investment of 8% p.a. GUARANTEED, Tax-Free and FREE Insurance:

  • Invest Rs. 10 lakh per year for 10 years in a Guaranteed Insurance Plan.
  • You will get a Life Cover of Rs. 1 crore.
  • From Year 21 to Year 34, you will get a Guaranteed Payout of Rs. 5,06,380
  • At end of year 34, you will get a Guaranteed maturity of Rs. 3,94,62,300
As an incentive to buy this scheme, the banker also offered to reduce the interest rates on my friend's CC Limits!!

This friend, who is a successful business person & brilliant in his work, could not understand what the plan meant but was suspicious of the fact that if the plan was actually so good, why would the banker offer incentives for investing in the plan! He sought my advice.


The best approach in such cases it to use the XIRR calculation in MS Excel. XIRR gives the return % p.a, for a series of known cash flows.

Using the XIRR calculation in MS Excel, one can easily see that the actual return being guaranteed is only 5.47% p.a. (The actual yearly investment would be Rs. 10,30,900 for 1st year & Rs. 10,15,450 for year 2 to year 10)

On careful reading of the brochure given by the banker,it was clear that even this 5.47% p.a. was not guaranteed!!

It is strongly recommended to be familiar with XIRR Function to ward off such fraudulent bankers who are chasing their own bonuses rather than their clients' interest!

For a demo, click http://www.deepamfinvest.com/deepam-learning-centre/irr


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