Designed to keep you poor: Example of how bank income schemes underperform the market.

Last week, I wanted to get an add-on credit card for my wife. I enquired with my relationship manager. Though this is possible without getting a savings account for her, my manager insisted on getting a bank account to meet their targets which I agreed to, and they sent one representative to my house to get this done.

Once he came and finished his document collection steps, he asked me whether I was looking for any investment schemes or income schemes. He then introduced me to an investment/income scheme with the description below.

  1. The customer pays Rs 3Lakhs annually for the next ten years.
  2. Wait for the next five years.
  3. After these five years, the customer will start getting Rs 3.83L per year for the next 35 years plus the initial investment of 30L ( 3L per year done for ten years)
  4. I didn’t ask them if there was any early exit plan.

From a superficial perspective, this seems attractive as you are paying 3L per year for ten years only and getting 3.83L for 35 years, as well as your initial corpus. (i.e., you pay 30L and bring about a whopping 1.64 Crores)

Now, Isn’t 1.34 Crore big enough for an investment of 30Lakhs? Well, the answer is both Yes, and No; it depends on the horizon of time you are considering for your investment. Earning 1.64 Crores over 35 years is not something extraordinary.

Why ??

Say you want to invest 3L per year, i.e. around 25k per month, and assume you are investing this on some mutual fund or exchange traded fund which gives annualised returns of around 10%.

As per the bank scheme, you do this for ten years, and at the end of ten years, you will have only 30Lakhs in your hand.

But if you invest this into some fund mentioned above at the end of 10 years, your investment will be worth around 51.63 Lakhs.

Now you won’t be able to touch your money for the next five years, and you won’t be making any further investments.

So let us assume we are not investing further and see how our 51.63L will grow in the next five years. So this will become around 84Lakhs in the next five years, assuming 10% Growth every year. I.e., at the end of the 15th year, you have 84L in your hands, whereas the bank might give you something or just your initial investment.

Now that you have finished your 15th year, it is time for the bank to give you monthly returns.

Let us look at scenarios and understand this.

  1. We are not withdrawing/investing any money further. We exit this after 35 years (i.e. a total of 50 years since our first investment). In this case, you will end up with 27.41 Crores.
  2. Say we are exiting this at the 40th year since inception, then the corpus will be around 10 Crores.
  3. 30th year since inception will give a corpus of 3.7 Crores.
  4. The 20th year since inception will give your a corpus of 1.39Crores.

You can see how this grows as follows Investments without yearly payout

Let us look at the scenario in which the banks tried selling to us.

  1. Say we are taking out 3.83 L every year. Even then, we would end up 15Crores +ve at the end of 35 years.

Investments with yearly payout

You can use online finance calculators to play around with this, figure out various schemes, and choose something best for you. Personally I have used The Calculator Site to figure these out.