My First Investment: A true life story

After completing my engineering and coming on tops in the university, I started working as a Lecturer in my engineering college. Teaching was my first choice and I took it preferring it over better jobs like NTPC and BHEL. When we were staying in the transit accommodation provided by my college, I had a friend staying with me as a guest. This friend of mine worked in one of the leading manufacturers of Electrodes in India.

My friend Anil, had colleague whose part time job was to sell insurance products for Life Insurance of India as an insurance agent. This insurance agent Ramesh, was working as the EA to their VP-Sales in the electrode company. The reason why he was successful as an insurance agent was because all the sales engineers across India bought insurance products from him to remain on his good side. The hidden advantage was that Ramesh will help them with insider information affecting them and their department and also help them in clearing their re-imbursement bills.

For these aforesaid reasons, Anil wanted to buy an insurance from him, and because he was going to visit us on a Sunday, Anil also wanted me to preferably buy one insurance cover to help him be closer to the Executive Assistant than his other peers.

So Ramesh, visited us on the Sunday and after suggesting an insurance for Anil and taking his cheque, he turned on me.
“What is your age?”, he asked me.
“I will turn 22 this June.”
He took out his diary having a look at some table he had, he suggested, “Manoj you should go for a money back policy.”
Since I was very new to the concept of insurance at that time and the only thing I knew was that my father did have some insurance, I asked, “What is money back policy?”
“In money back policy, besides the lump sum amount you get at the end of the insurance term, you also get a part of the bonus as fixed payments every five years”, Ramesh explained. He explained how buy just paying Rs. 1002 half yearly for next 25 years, LIC will cover me for Rs. 50 grands and pay me Rs. 7500 in the fifth, tenth, fifteenth and twentieth years.

Ramesh also revealed, “Manoj you can actually make Rs. 5,00,000 by just investing just about Rs. 50,000 and that too spread over 25 years.”

Now this was something very exciting. This statement definitely activated my antennas and I was definitely interested in his proposal.

He explained that every year LIC declares bonus for such policies to tune of Rs. 60-70 per thousand. For example last year it declared it at Rs. 64/thousand, what this means is that last year a bonus of Rs. 3200 would have been credited to my policy account had I bought it last year.

Then he drew the following table for me:

	Fifth Year	Tenth Year	Fifteenth Year	Twentieth year
Fifth Year	7500
Tenth Year	15000	7500
Fifteenth Year	30000	15000	7500
Twentieth year	60000	30000	15000	7500
Twenty Fifth Year	120000	60000	30000	15000

Those days in 1990, the rate of interest on post office fixed deposits was approximately 13%. What I knew was that those days money doubles in 5 years. This table drawn by Ramesh was actually depicting that if I re-invest all the money given back by LIC without taking them in the next 25 years, the total amount accumulated is the sum total of all the amounts written in the above table.

If you sum them up it comes out to a whopping Rs. 4,20,000. Add to this the total amount put by me and bonuses accrued to me in 25 years. It totals to Rs. 1,10,000 by totaling the amount paid to LIC in 25 years and the bonus minus the money received back from LIC in each 5 years. So the total returns in 25 years, will be more than Rs. 5,00,000.

Now that I know how to compute the annual returns of this investment, I know that this amounts to XXX % return per year even if we assume that the whole Rs. 50,000 is invested in lump sum at the start of the 25 years. This return is very good considering that the money invested in LIC is deployed in safe investments and also this investment carries an insurance of Rs. 50,000 which costs money to LIC. Moreover, investment in insurance was tax free to the tune of 20%, and the promised return at the end of 25 years was also tax free.

Actually I was not supposed to invest in a lump sum but distributed over 25 years @ Rs. 1002 per six months, the annualized return of this investment comes out to be an attractive 16% which is better than the rate at which the stock market has grown over the last 10 years.

What are your views on this investment, dear readers? Does it look too good to be true? Do you think I was able to generate the promised returns? If not, was Ramesh at fault? Was he trying to promise me more than what I could achieve?

Today, after fifteen years of subscribing to this insurance policy and having paid 30 half-yearly premiums and taken the money back thrice, I am no where close the Rs. 5,00,000 mark or even half of it. I am also sure that I will be nowhere close to half of 500K after the tenure is over i.e. after 10 year.

Whose fault is it? Mine or Ramesh’s?

There are 2 reasons why I was not able to reach the financial goal which was sold to me at the start of this investment:

For a long number of years before 1990 when I made this investment the prevailing rate of interest was more than 12%. Hence, Ramesh believed that it will remain so in future, he never imagined that it will not be so. I too believed in him for similar reasons. For years I had heard from my dad and read in newspaper ads, that money doubles in 5 years. Unfortunately for me and for my investment, the rate of interest in government securities have dropped continually from 1991 till date and now it takes more than 12 years for the money to double.
The other reason is totally my fault. That of lack of financial discipline. The first money back investment was utilized in buying a refrigerator on the birthday of my wife when we were courting each other. The second installment was spent for ‘I-do-not-remember-what’. The third installment is lying in a saving bank account of ours earning us a return of 3% per annum.