Wednesday, October 30, 2013

ICICI Prudential Life Insurance uses Service calls to churn ULIPs/ULPPs - Beware

I have been recently receiving “service”calls from ICICI Prudential Life Insurance Company informing me that their Relationship Manager wants to meet me to discuss about my existing policies with them.  After couple of calls, I yielded to their request to meet the Relationship Manager with the condition that it shouldn’t be a sales call.  They agreed and their Relationship Manager met me yesterday morning.

A short introduction about my investment in ICICI Prudential Life Insurance.  I hold ICICI Prudential Lifetime Pension plan with an annual subscription of Rs10,000 for the last 9 years. 

The first question he asked on seeing me was if I am software professional.  I said no. I don’t know if they are soft targets.  

The meeting, a service call, started with the mention by the RM that I should stop paying the premiums on my existing policy and should invest in a new policy.  The beautiful reason given by the RM was that they have launched a new equity fund where the NAV would be only Rs10 per unit compared to my scheme where the NAV would be Rs78 per unit.  I couldn’t believe what he was saying the first time because this lower NAV is one of the oldest tricks in the market place and I didn’t think ICICI Prudential would do this after so many years.  But he further emphasized that I will get more units by taking a new plan.  This is an outrageous suggestion because if the equity markets perform well, the NAVs would move irrespective of the current value. 

Then RM told me that the new “Maximiser” fund option would have portfolio changes every 15 days compared to portfolio changes in my old “Maximiser” fund, which has 30 days.  This is again totally wrong information.  Here, what he is talking about his portfolio disclosure and portfolio changes.  The poor guy doesn’t understand this difference and tries hard to sell this as a unique feature of the scheme.

I told him politely that I am not keen on that idea and happy continuing with my existing policy.  He tried hard to sell me this idea of lower NAV and frequent portfolio changes but after sometime I had to cut him short.   When you stop premiums on the old policy and take up a new policy, then you end up paying lot more charges.  ULIP/ULPPs being front loaded products would be able to produce returns only when you stick on to them for longer tenures.

What really annoyed me is that ICICI Prudential Life uses a service calls as an alibi to meet their old clients and encourage them to churn products.  This is nothing new in Insurance industry but this happening in an era where mis-selling of financial products by financial product distributors are being looked upon very seriously by the regulators. 

Secondly, the level of understanding the Relationship Manager has with regard to his own company’s products are poor.  He could never understand how the equity market and returns function. 
I am not sure how many thousands of gullible investors have fallen prey to this gimmick of lower NAV and therefore higher units and switched to newer plans.  This is an outright fraud.  I know about ICICI Prudential Life because I own a policy with them but there may be many other people like this in the market.

This brings me to an important point of the need for understanding financial markets and how your investments work.  You need to spend time and energy to understand them or you should consult a reliable Financial Planner/Advisor before buying these kinds of products.  

PS:  All through the discussion I didn't disclose my profession and what I do for living, which is Financial Planning and Advisory services.  But finally I told him about me and he was quite taken aback.  Literally ran short of words.  Not wanting to embarrass him any further, I let him go.  

Monday, October 14, 2013

Power Finance Corporation - Tax Free Bonds - October 2013



Power Finance Corporation (PFC), a PSU Navaratna company has come out with a tax free NCD Issue for Rs 750 crores in October 13 (with a green shoe option up to Rs 3876 crores). The PFC Issue has attractive yields over tenures of 10 years, 15 years and 20 years and is very relevant for those in the 20% and 30% tax brackets.  NRIs can also apply for these bonds on a repatriation as well as non-repatriation basis.

Credit Rating:

These bonds have been rated “AAA” by all the three credit rating agencies which is the highest rating.  The total loan assets of PFC were Rs 160,000 crores with a Gross NPA of 0.71% and a comfortable capital adequacy ratio of 17.98% as of 31st March 2013.


Issue Opening Date
14th Oct 2013
Issue closes on
11th Nov 2013
Credit Rating
AAA by CRISIL,  CARE and ICRA
Face Value
Rs 1000
Minimum Application
Rs 5000 (minimum of 5 bonds)
Coupon - Category IV (Retail – Up to Rs 10 lakhs)
10 year - 8.43%
15 year - 8.79%
20 year - 8.92%
 



Advantages of this Tax free bond Issue


  • The post tax return of 8.79% (15 year duration) and 8.92% (20 year duration) is much higher than normal bank fixed deposits (between 6 to 7% at current FD deposits for those in the 30% tax bracket)
  • There are no upper limits (unlike PPF accounts where there is a limit of Rs 1 lakh investment per year) on the total investments.
  • It is ideal for investors looking to lock in returns for a large amount of money over the long term
  • No wealth tax will be levied on the investments in these bonds
  • The  bonds will be listed and traded on the BSE (but the liquidity of these bonds remains to be seen)
  • High degree of safety (AAA rating) for the bond which is also secured by a charge on the book debts of the company

   Investment Recommendation:

We recommend investing in this tax free bonds from PFC and you may either choose the 15 year or 20 year option depending on your time horizon.  It is an excellent product to add to your debt portfolio towards long term goals like retirement planning or children education.   

The important point to be noted here is that the annual interest payouts should be deployed in other avenues to grow the corpus rather than leaving the money to be spent for living expenses. It is better to move the yearly interest to PPF or debt mutual funds or equity mutual funds as per the investor’s risk appetite.