You may not be adequately insured through SIPs in MFs
We Indians are ardent savers of the hard earned money we earn. But while doing our investments - be it for our retirement or children education / marriage, we seldom feel the need to insure ourselves. In our busy daily lives (mostly of city dwellers), we often ignore or procrastinate, the decision to insure ourselves and our family adequately.
But now here's some good news. In order to compete with Unit Linked Insurance Plans (ULIPs) of domestic insurance companies, now domestic mutual fund houses are reviving a scheme, whereby you'll be provided with an insurance cover as you invest in equity mutual fund scheme(s). It is noteworthy that such an investment- cum-insurance scheme was kept on the backburner almost for three years as the capital market regulator - Securities and Exchange Board of India (SEBI) and the insurance regulator - Insurance Regulatory and Development Authority (IRDA), had crossed swords, after SEBI demanded part-regulation of ULIPs (as they were investment products as well). Thus, mutual fund houses that were set to launch an equity-insurance product too dropped plans to launch such schemes.
But at present with the regulatory impasse easing, domestic mutual fund houses have once again started rolling out insurance-wrapped funds. Asset managers such as Birla Sun Life Mutual Fund, Reliance, ICICI Prudential Mutual, among others have launched funds with an insurance cover over the past two to four months. Fund marketers are trying to make use of the negative perception surrounding ULIPs, especially about its cost structure and disclosures, to push their products.
Most of the mutual fund houses have schemes with a maximum cover of upto Rs 20 lakh. These mutual fund schemes are structured in a way to pay out about 50 - 100 times the Systematic Investment Plan (SIP) amount provided that an investor stays invested in the fund for two to three years. But, in case of redemption from a respective fund, the benefit of an insurance cover will not be offered. Moreover, the insurance cover shall start only after a waiting period of 60-90 days of enrolment; but in case of accidental death, the waiting period is not applicable.
Thus in case an investor wants to enjoy an insurance cover as he / she SIPs into mutual funds, it will be imperative for one to stay invested over a long-term period of time.
PersonalFN is of the view that, while insurance-wrapped mutual fund schemes is an innovative idea aimed at promoting long-term investing habits amongst investors, - and certainly a luring proposition; we think that investors should not enrol into a SIP of any mutual fund scheme merely because it is providing an insurance cover for free. One should select a winning mutual fund prudently, and thereafter opt to invest vide the SIP mode, and avail the insurance benefit, if available. Moreover one should not rely merely on insurance-wrapped mutual fund schemes to meet their insurance requirement, but instead also look at "pure term insurance plans" which are a cost-effective proposition to insurer you optimally. We are also of the view that investors should ideally deal with their insurance and investment needs separately.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm