LIC joins the yield-cut wagon

Suresh Krishnamurthy

THE popular investment product of the Life Insurance Corporation of India, Bima Nivesh, is likely to have slipped down a few notches in its popularity this week.

From July 24 2001, a revamped product, Bima Nivesh 2001, has been introduced which offers significantly lower yield to investors than the earlier scheme. The yield on the five-year and the 10-year investment option has come down by 2 percentage points.

This move was expected given that LIC had indicated earlier that it would be bringing down the yields on all its investment and quasi-investment products. In addition, the sharp fall in interest rates on various schemes probably forced this choice on LIC. From an investor's perspective, the moot point is if yields would be increased if interest rates rise.

Bima Nivesh 2001, however, has a feature investors would like. The restriction regarding age has been brought down. Earlier, the minimum age at entry was 35. This has now been scaled down to 18. Clearly, competitive forces appear to have started working in the insurance industry.

As things stand, the yield on the five-year option stands at around 12.5 per cent while the yield on the 10-year option stands at 9.9 per cent. This clearly suggests that investors should avoid the 10-year product. The latter would make sense only if the yield on an investment with a term to maturity of five years would be 7.33 per cent five years from now.

This would require a significant fall in the prevailing rates of interest. While the Reserve Bank of India has indicated its preference for a low interest rate regime and there is the possibility of a steady decline in interest rates over the next few years, it may not fall to a level of around 7.3 per cent. If it were likely to stay at a level above 7.3 per cent, then investing for 5 years now and then re-investing 5 years hence would provide a higher return to an investor.

Another issue investors need to remember is that the yield on the 5-year investment option is still higher than what competitors offer. This is because the competitors offer it with an insurance option and do not offer a stand-alone investment product. For investors who do not feel the need for an insurance component, Bima Nivesh is a better choice.

On the other hand, if there is need for insurance, the products available in the market need to be compared. The new Bima Nivesh 2001 too allows investors the choice of insurance. It will be interesting to see how by including the insurance component, the various products stack up.