Post-budget, here are the products that investors need to focus on now

Budget 2023 is being hailed for the changes in personal taxation but the thing I liked most from a personal finance perspective was the focus on curbing mis-selling of investment products by tweaking their characteristics. These changes would certainly save investors, across the board, from making some costly mistakes.

Non-ULIP (unit-linked insurance plans) products with aggregate premium above ₹5 lakh in the first year will now be taxable at slab rate. For ULIPs, the rules were already amended that they could be tax free, only if the premium paid was less than 10% of the sum assured, and that the yearly premium was less than ₹2.5 lakh.

For decades, investment-linked insurance products have been palmed off to customers as high yielding products, which help meet all financial goals. This, though, is far from the truth. These products do not beat inflation and that’s reason enough to stay away from them. What attracted investors were the tax deductions and tax-free returns.

I get many queries from high net worth individuals (HNIs) in their 40s on capital guaranteed insurance plans as some of these plans promise 7-8% annual payout. The thing that investors do not realize is that this payout is not immediate but after a period of 10-20- years. Further, returns are promised on the sum assured and not the premium paid. All these lead to actual returns being very low. Investors are not conversant with the right way to calculate actual returns (i.e. XIRR) and do not read the fine print. HNIs are also drawn to products like market linked debentures (MLD) with an exclusivity tag and due to their more predictable returns on equity structures.

The budget proposes to tax returns from listed MLDs as income from other sources and rightly so, since MLDs are actually fund-raising instruments for the issuers, a point not known to all investors. It would have been good to include unlisted MLDs too in this criterion to stop the complete mis-selling of this product.

While it is good to see financial innovation, and consumers too want newer, quick yielding instruments to invest into, one must never forget the basics. High costs eat into returns and risk needs to be assessed correctly—where does the instrument actually invest and what could go wrong on this front. Unfortunately, investors are not able to figure out hidden costs or risks. Investors are better off betting on transparent, low cost, widely tracked investments, even if they are not exclusive.

A good alternative to capital guaranteed insurance schemes is the national pension scheme (NPS). Not only does one save on costs, but it also gives better returns (provided you choose the active choice) and a regular income in retirement, as desired. NPS is also much more transparent compared to any insurance scheme in terms of where it invests. Investors also find it easier to understand the account statements.

Compared to MLDs (which give capital guaranteed equity-based returns),target maturity funds (TMF) can provide better predictability of returns and, given their portfolio composition, safety of capital. But TMFs may give lower returns. However, it is still a better option since TMFs provide a diversified, high-quality portfolio and do not bet on one entity. Of course, those who can take higher risk and believe in the India story can invest in index funds or dynamic asset allocation funds.

A combination of a TMF and an index fund should be able to beat MLD returns any day. It is better to bet on the Indian markets growing in the long term over the probability of a specific index level being achieved on a specified date.

Choosing funds is always a challenge and this can be easily solved by using the Mint 20 list of mutual fund schemes.

With alternate investment funds also expected to soon have stricter norms on commissions, what is right for the customer will be the way ahead. With undue arbitrages being fixed, it has become easier for investors to evaluate products based on characteristics and not tax benefits. They should now focus on managing risk and beating inflation.

Mrin Agarwal is founder director, Finsafe India.