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Mutual Funds / Industrywatch

MAGAZINE | SEP 24, 2008

Dont let the free insurance bait lure you to new SIPs. a term plan plus MFs, or ULIPs make sense if you want to combine investing and insurance
SUNIL DHAWAN

Theres no such thing as a free lunch as they say. That holds true for offers of free insurance with a systematic investment plan (SIP) being offered by some mutual funds. The cover comes at the cost of liquidity of funds. So, these plans do not give an investor the flexibility that open-ended mutual funds give. Before settling in for one of these product, it will be worthwhile to compare them with a similar productunit-linked insurance plans (Ulips)that combine insurance and investment. Consistent market volatility has put pressure on the inflow of funds in the coffers of asset management companies (AMCs) due to dwindling sales of mutual fund units. The offer of free insurance, along with SIPs, seems to be a bait to attract investors as well as to get regular income, the way insurers do. Although the sale of Ulips, also a marketrelated product, has also gone down due to weak stockmarkets, it has not affected life insurers kitty too much. This is because insurers at least have a passive inflow in the form of renewal premiums. ULIPs vs SIP WITH INSURANCE The products. For the financially disciplined, a pure term plan works best if the rest of the savings are being channelised into MFs. For others, Ulips do the job, albeit at a cost. The SIP with insurance plans work slightly differently (see One & One Makes Two? 27 August). Reliance SIP + Insure (RSIP), Birla Sun Life Century SIP (BSIP) and Kotak Star Kid are the only such products available in the market now. These offer a cover for the period the investor keeps his SIP alive. If there is no claim during the tenure, the SIP will continue like a normal one and the investor will get no insurance benefit. In BSIP, if death occurs mid-way, the nominee gets the sum assured as well as the fund value on the payout date. In the case of RSIP, the death benefit does not go to the nominee and instead gets reinvested along with other fund units. Here we take into account only RSIP and BSIP since Kotak Star Kid entails an additional 1.25 per cent entry cost. We compare these with Ulips that give the sum assured as well as the fund value in case of death. Amount of cover. The life cover in SIPs will depend entirely on the monthly contribution. Ulips, meanwhile, take into account factors like the age and term before fixing the cover. In a Ulip, a monthly premium of Rs 1,000 will fetch a cover of around Rs 4.86 lakh. On the other hand, in BSIP, the same amount will give a cover of just Rs 1 lakh, and that too after three years. In RSIP, the insurance cover will be Rs 3.60 lakh. To make the comparison clearer, heres another calculation. A 30-year-old who needs a cover of Rs 9 lakh over 15 years will have to make a monthly investment of Rs 9,000 in BSIP, or around Rs 2,500 in RSIP, or around Rs 2,400 in a Ulip. While in Ulips, the sum assured remains the same throughout the term, in RSIP and BSIP, the amount varies across different time periods. Maturity benefit. The front-end costs are higher in a Ulip than any SIP. However, low fund management charges in a Ulip helps generate a bigger corpus over the long term. The SIPs entail just two costsentry load of 2.25 per cent and the annual fund management charge of about 2.2 per

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cent. Ulips, on the other hand, normally charge six to eight costs. In our example above, if the 30-year-old invests Rs 2,500 per month in any of the two SIPs being discussed here, the maturity benefit will come to Rs 8.29 lakh, assuming a growth of 10 per cent. In a Ulip, for the same amount and term, the maturity benefit would be Rs 8.34 lakh. For the Ulip, we assume an entry cost of 25 per cent each in the first two years, 3 per cent in the third and fourth years and 1 per cent thereafter (see The Benefits and Costs). Premium payment and redemption. Most Ulips give the flexibility of stopping premium payments, and making full or part redemption at no cost anytime after the initial five years. BSIP does not ask for regular payments. The investor can stop paying instalments after the first three years for a term of 55 years minus his age. However, any withdrawalfull or partor a fund switchover during the term would cancel the insurance cover. So, in order to retain the cover, the investor will have to leave his money locked in for longer periods. The good part is that there is no exit cost for such withdrawals. In RSIP, regular premium payment throughout the term is a must. Whats more, any withdrawal attracts an exit load of 2 per cent. In our example, if the investor exits in the 10th year, he would have to pay an exit load of around Rs 8,900, a price that you would have paid for a group cover for that period. This means that the insurance cover comes at a cost and is not really free. The investor is paying at the end of the term what he normally pays at the beginning in case of an insurance policy. WHAT TO DO The primary aim of investing in these SIPs should be investment and not insurance. Remember that your financial planning is not complete without a combination of a term plan and mutual funds, or a standalone Ulip. However, if you still want to go for these new products for your insurance needs, among the two discussed above, RSIP looks better placed. Before buying, make sure you fully understand the product. sunildhawan@outlookindia.com

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