Stay insured and invested

Mayur kale, a 31-year-old assistant manager with HSBC Bank, has it all: Security, tax savings and the prospect of handsome returns, to boot. Kale has chosen life insurance as his avenue of investment, over mutual funds or investing directly in equities through a broker. "I prefer insurance as it assures me of safety and at the same time gives me a tax advantage on my investments," says Kale who has half of his savings locked up in insurance products. Some 35 per cent of the rest is in fixed return instruments and the remaining 15 per cent in the bank. "I don't want my savings to be linked to the market, which is why I have invested in an insurance policy that will give me a fixed rate of return on maturity," elaborates Kale.

Clearly Kale is thinking long-term-of life after retirement and in case he pays up nature's debt before that, his family is entitled to a lump-sum payment. It's this twin benefit of returns plus security that's convincing millions of investors to opt for insurance plans as an investment engine. That's reflected in the growing numbers. In the last four years, the assets under management (AUM) of the life insurance industry have grown by 114 per cent, from Rs 2.8 lakh crore in March 2004 to Rs 6 lakh crore in March 2007. The equity portion of the total AUM has grown by 26 per cent to Rs 1,50,000 crore from Rs 1,190,00 crore in March 2006. And although financial planners will advise investors to balance their asset allocation to include mutual funds and stocks, life insurance players have their own views.

Says Puneet Nanda, Chief Investment Officer, ICICI Prudential Life Insurance: "Investors are opting for insurance as we provide an assured sum with safety, stability and returns." "The perception that we (insurance) are safe managers and ensure the safety of investor money has seen investors lining up with us rather than going with mutual funds," adds S.V. Mony, Secretary General, Life Insurance Council.

Mony explains that it is the carrot of an assured return-which for many investors is more important than a higher return-is what makes investors opt for insurance products, despite them turning out returns that are lower than those from mutual funds. That would explain why the retail clientele in insurance is over 10 times that of the mutual fund industry. Industry estimates indicate that the insurance sector has attracted 8 crore investors, compared to just around 75 lakh investors in mutual funds.

The cheerleaders of the industry are quick to point out that it's not just the safety aspect that's luring the retail investor to insurance. "Apart from safety we provide investors the convenience of a complete solution-a fund option, life insurance as well as health riders under one roof," says Nanda.

"Even our style of investment is risk-free, as we aren't frequent churners of our portfolio, something that mutual funds are known to do." Indeed, mutual funds periodically come under redemption pressure, and also the pressure to churn portfolios in a bid to ensure continuous positive returns. If they can't do that, the investor will simply flit to a rival fund. Concludes Life Insurance Council's Nanda: "Our conservative investment approach in risky assets would discourage short-term investors but it helps us garner confidence of those who are in it for the long term."

Mutual Funds vs Insurance

Both categories have their advantages (and disadvantages) 

Mutaul  Funds

•  Returns are higher
  
• Fund management is active 
  
•  Lower distribution fees 
  
•  Tax liabilities in some schemes
  
• Offers a range of products in debt and equity
  

Insurance

•  Lower returns, but risk, too, is low
  
•  Ideal for long-term investors
  
•  Offers switching between asset classes without any load
  
•  No tax liability
  
•  Security is a big trigger for investing
  

If short-term investors are discouraged, that's because of the initial high cost that's incurred. That high cost in turn is courtesy the fat commissions that agents stand to earn from the insurance company on individual investments. If investors are in a mood to move out, they clearly stand to lose. But regulations favour insurance companies, as the minimum investment horizon in an insurance product is five years. A fairly low average ticket size of Rs 20,000 for an insurance product-as against over Rs 1 lakh for mutual funds-is also an advantage. What's more, anomalies in taxation- for instance debt funds draw a minimum 10 per cent capital gains tax-go against mutual funds.

Yet, it isn't as if mutual funds don't have their advantages. For one, they're more liquid and provide ample exit options. For another, their returns are far more impressive. However, for conservative investors, who're willing to sacrifice returns and keen to eschew risk, insurance is an attractive option. After all, it still beats letting your money lie idle in the bank vaults.