This is the story of many individuals where during last minute the agent convinced them to buy a policy / Mutual fund scheme that they don’t really need. This happens because of lack of planning and financial awareness.
Not only the insurance policy or Equity Linked Saving Scheme (ELSS) of mutual fund but from last few years Rajiv Gandhi Equity Saving Scheme (RGESS) was also the part of mis-selling. (RGESS is now discontinued by the government) Agents push these products to investors as they get handsome commission and few also pass back it to the investor as discount. And not to blame agents alone, investors are also equally responsible for this. So, what to do if you are trapped into above schemes and now realizing your mistake?
Tax Saving Mutual Funds (ELSS): - If someone has invested in Tax saving mutual funds with a short term view of 3-5 years then this can be a mistake. Tax saving mutual funds are equity based schemes and equity generate goods returns in long term. One can align the investment with their long term goals and utilize the gains. This fund comes with a lock in period and the units are compulsorily locked in for 3 years. The only situation in which units can be redeemed within 3 years is in the case if investor passes away. Here also the proof is required to be shown to the AMC.
Rajiv Gandhi Equity Saving Scheme (RGESS) – If someone has invested into this scheme during last 2 years then he is allowed to sell the securities in the next financial years, however, he also needs to buy the same amount of securities to maintain the balance of the last financial year. The RGESS portfolio at any point of time should holds the same balance which was at the end of last financial year. In case the investor is unable to meet the conditions as specified under this scheme then the tax benefit will be withdrawn.
Surrender charge is the cost which one has to pay if insurance is bought without any planning. This charge is applicable on almost all policies. However, the rate of surrender depends upon the kind of policy, like ULIP or traditional, single premium or regular premium, etc. These charges are as high as 60% during the first few years and reduce every year.
Surrender charges for ULIP – The policy which were bought before September 2010 suffer the most as the surrender charges were not fixed then and during first 3 years were as high as equal to the one year premium. Those policies were issued with a lock in period of 3 years. The surrender charges for such policy are less after 3 years. Post September 2010 the rules were changed by IRDA. The lock in period was increased to 5 years and capping was done on surrender charges. Now even the surrender is not allowed before 5 years. After 5 years the surrender charges are zero in some policies.
Surrender charges for Traditional Plans - If an endowment policy or money back policy is a single premium plan then surrender is possible immediately and almost 90% of the investment is paid back. However, if the policy is regular premium paying plan then surrender charges during 1st three years are very high up to 60% and reduces later. The surrender charges in such plans are 30% of the total premium paid, excluding 1st year premium.
What if you are stuck with any one of the above product -
If an investor has accidently purchased ELSS then it’s better to align the investment with the long term goals and change your future investment strategy accordingly. As explained above ELSS is an equity scheme, hence it will generate good return in long term. Similarly if someone has a ULIP, which is more than 5 years old and yearly charges are low then it’s good to continue for long term.
If investor is stuck with a traditional policy then it’s better to remain invested for at least 3 years. Once this is done either one can align the investment to the future goals and treat the investment as a debt contribution in the portfolio or can also paid up the policy and stop the future payments. The premium will be paid back on maturity. And if an investor has invested into RGESS, then it is better to stay invested till the lock in period is over. Once it is over it is better for an investor to get out of this scheme as it is about direct equity investment and very less people can manage their portfolio properly.
Above all of this one also need to keep in mind tax related issues while surrendering any of the investment products. We highly recommend to consult an investment adviser in case if any investor is stuck in such situation.
So are you victim of mis-selling? Do let us know if you need any help.