Is Insurance With SIP a Worthy Idea? Know Here…
Dec 26, 2018

Author: PersonalFN Content & Research Team

Indians are becoming increasingly aware of the long-term benefits of mutual fund investing.

The popularity of Systematic Investment Plans (SIPs) has been on the rise thanks to investor awareness campaigns such as Mutual Funds Sahi Hai.

The bull-run in Indian equities that lasted nearly three years starting in 2014 has also helped in increasing investors’ participation in equity mutual funds. Despite, the tough market conditions in 2018, the Indian equity markets did reasonably well only because domestic investors showed faith in them.

But as it always happens, mutual fund distributors don’t want to let go any opportunity to sell equity schemes aggressively even this time. Mutual fund houses, too, have come up with innovative marketing activities to take advantage of upbeat investors’ sentiment.

Since SIPs have grabbed the attention of investors, convincing them to start one has become child’s play. Now the challenge is how to make them stay invested for the long haul.

Mutual fund houses and their distributors are now relying on some old time-tested tricks. Nowadays, you would see them promote close-ended schemes quite often. With this, they get an investor in for at least three years. Additionally, they have started pushing the duo of SIP-insurance.

[Read: Will SEBI Shut Down The Close-ended NFO Factory? ]

What is SIP-insurance?

It’s not a new concept. About a decade ago, Reliance Mutual Fund started this innovative concept; where fund houses offered a free term insurance cover to mutual fund investors to invest in their selective funds through long-term SIP commitments.

At that time, Unit-Linked Insurance Plans (ULIPs) insurance companies offered were in the limelight for their notorious cost structures.

Initially, ULIPs had great success when they had started providing market-linked insurance plans to Indian investors, who until then had seen only age-old endowment plans offered by the state insurer.

ULIPs ate into the mutual funds’ market because investors thought insurance was an additional feature in ULIPs, which was missing in the mutual fund schemes.

Insurance companies literally robbed investors by deducting upto 55%-60% of first year premium towards fees under various heads. Eventually, investors realised this.

Mutual fund houses such as Reliance Mutual Fund sensed an opportunity to persuade dismayed ULIP investors and offer them insurance cover for free. Other fund houses such as Aditya Birla Sun Life Mutual Fund and ICICI Prudential Mutual Fund also joined the bandwagon.

Unlike ULIPs, SIP-insurance are cost-efficient, but there were catches too.

How SIP-insurance functions?

When you start a mutual fund SIP, the fund house offers you an insurance cover with respect to your monthly SIP amount. For instance, if you start a SIP of Rs 5,000, you would get 10 times insurance cover, i.e. Rs 50,000 in the first year, 50 times in the second year, and 100 times from the third year onwards. In other words, if you continue SIP of Rs 5,000 for more than three years, you will get an insurance cover of Rs 5 lakh until you stay invested, even after SIP stops.

But the catch is, the amount of insurance coverage will be capped at Rs 50 lakh (and at Rs 20 lakh in the case of some mutual fund houses).  And if you redeem your investments even partially, the insurance cover will cease.

Usually, a fund house offers a cover only for an age group between 18 and 55, to safeguard its interest. Premiums for investors above 55 can be pretty high.

Don’t get lured to SIP-insurance…

Instead of falling for such investment products, deal with your insurance and investment needs separately.

When it comes to insurance, assess your Human Life Value (HLV) – a scientific approach to determine how much insurance cover you ideally need to protect your dependents from a financial loss in the case of an unfortunate event. PersonalFN’s HLV calculator can help you know the optimal insurance cover you need.

While investing in a mutual fund (even when you are investing through SIP), it is imperative to ensure that your investments are in line with your risk profile, investment objective, financial goals, investment time horizon before goals befall, which, in all, goes on to determine your personalised asset allocation for investing.

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

Furthermore, you should invest in mutual fund schemes that have a reliable performance track record and managed by process-driven fund houses. If a fund house depends excessively on a particular fund manager and doesn’t follow sound investment processes, the returns on your investments might disappoint you. Portfolio concentration, the track record of other schemes managed by a fund manager and the funds-to-fund manager ratio are some of the important factors you should pay attention to.

Want to know how to select mutual fund? Watch this video:

Editor’s note:

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