Pension Funds in India

HDFC recently tried to sell me “Classic Pension Insurance Plan”

Here are some of the salient features of the plan:

It is a 30 year plan where for the first 15 years, I would have to shell 1Lakh rupees every year and after 30 years (Nov 2041), I can expect:

1. Guaranteed benefit of 2,488,809/-: Now that is not really a return because it works out a return of 2.135% I guess my savings bank account can deliver more.
2. Same can be said about life cover because the returns one gets a return of 6% on the investment irrespective of the fund performance.
3. If the fund delivers 8% p.a. returns then after 30 years you get a 4.8% return or 45Lakh.
4. If the fund delivers a 10% returns then after 30 years you get an 8.7% return or 109Lakhs.
5. There is a surrender value: You invest 3 Lakhs over 3 years and you get 1L guaranteed in the 4 year. Even if your fund delivers 10% returns, you get 2.8Lakhs. So basically there are severe penalties for premature withdrawal.

Here is my analysis:

1. PPF gives me 8.5% guaranteed. So my returns from PPF match HDFC’s optimistic scenario.

2. If I die even 29 years 11 months and 29 days from the start of the policy, instead of getting 109 Lakhs return, I get only 55 Lakhs. So HDFC will ROB me of 50% of my savings.

3. PPF allows me to take loan/do a premature withdrawal (after 4 years) without any significant penalties. While in HDFC I do not only lose my interest but also the money I have invested.

4. PPF allows me to set the contribution level based on my financial situation. While HDFC will charge a huge penalty if try to delay/reduce my annual payment.

All these make me wonder WHY on EARTH will I invest in HDFC? But again there is no dearth of fools in the planet.

PS: Although PPF is a 15 year plan, you can extend it in 5 year blocks till your end of life.