Double barrel MF schemes

Unit-linked insurance plans, which provide insurance laced with investment flavours, have been the new popular investments on the street of late. A different combination of the same components—mutual fund products with insurance covers—also exists. So, do they mix stock markets and insurance profitably? Should one invest in them?

Sanjay Prakash, Director and CEO, HSBC Asset Management, says: “The key benefit is convenience and buying a packaged solution to satisfy a long-term investment goal.” Recently, HSBC launched SIP Plus, a systematic investment plan that comes with cover for critical illnesses sans medical examinations. Prakash believes the insurance addon is a good incentive for longterm equity investing.

Anand Shah, Fund Manager, ICICI Prudential Asset Management Company, agrees: “Such products are ideal for investors whose primary aim is investment but who would also like to take advantage of the free insurance. They are recommended for investors who seek growth and have a longer investment time horizon.” The insurance element is mostly added to the mutual fund products as a marketing effort to woo underinsured investors.

Wooing Investors
A number of funds are throwing in free insurance cover with their schemes.
Mutual Fund Scheme	NAV*	Absolute Returns (%) 6 months	Absolute Returns (%) 1 year
HSBC SIP Plus-Available for all HSBC Funds (SIP)	N.A.	N.A.	N.A.
Description: Provides insurance for critical illness (free of cost), permanent disability and/or death due to accident; maximum cover is for Rs 10 lakh
Reliance Tax Saver (ELSS) Fund	18.12	32.2	42.8
Description: Cover for accidental death is linked to investment levels: The lowest cover is for Rs 50,000 on investments of less than Rs 10,000, and the maximum is for Rs 5 lakh on an investment of Rs 50,001 and above; all have a lock-in period of three years
SBI Magnum Income Plus Fund-Saving Plan	10.60	0.4	1.4
Description: NRI investors are also eligible for cover; the cover is valid only till the age of 55
SBI Magnum Children’s Benefit Plan	18.43	8.3	10.5
Description: Cover for parents against accidents or the Magnum-holder against accidental death or permanent disability. Sum insured: Rs 3 lakh; an additional 10 per cent of the claim amount is paid to the child for education if either parent dies
HSBC Children’s Gift Fund-Investment Plan	29.88	19.5	25.9
Description: Provides cover against accident for a sum equal to ten times the face value of the units or a maximum of Rs 3 lakh; the AMC pays the insurance premium
HSBC Children’s Gift Fund-Savings Plan	16.53	12.7	11.4
Description: Provides cover against accident for a sum equal to ten times the face value of the units or a maximum of Rs 3 lakh; the AMC pays the insurance premium
Kotak Tax Saver-Dividend	15.69	32.0	53.0
Description: Free life insurance cover up to twice the amount invested
Kotak Tax Saver-Growth	19.72	32.0	53.0
Description: Free life insurance cover up to twice the amount invested
DSP Merrill Lynch Equity Fund (Growth)	166.31	40.6	63.8
Description: SSIP investors get a life cover of Rs 20 lakh
DSP Merrill Lynch Top 100 Equity Fund (Growth)	86.64	43.7	65.7
Description: SSIP investors get a life cover of Rs 20 lakh
DSP Merrill Lynch Balanced Fund (Growth)	51.74	29.7	44.2
Description: SSIP investors get a life cover of Rs 20 lakh
DSP Merrill Lynch India T.I.G.E.R. Fund (Growth)	53.70	56.2	79.6
Description: SSIP investors get a life cover of Rs 20 lakh
*NAV in Rs as on November 13, 2007 Source: Evalueserve

But these schemes have their share of skeptics. Dhirendra Kumar of Delhi-based mutual fund tracking firm Value Research is clear that “insurance and investment are both serious objectives. They should not be mixed”. Morever, he points out that “the regulatory cap on annual expenses of mutual funds limits their ability to provide any meaningful additional value.” SEBI requires mutual funds to limit their annual recurring expenses to 2.25 per cent of their average net assets.

Rahul Goel of Mumbai-based financial planning firm Personalfn.com points out that common add-ons of personal accident cover come cheap, sometimes as little as Rs 100 per year.

What, then, is the value-add for the investor? Prakash agrees that for a meaningful difference annual costs may not suffice. “So either the AMC absorbs the cost directly or does this via lower management fees that are charged to the fund within the overall cap,” he says, adding the costs are recoverable if the product features are delivered over three-to-five years. Investors tend to distinguish this through long-term loyalty, Prakash believes.

So, how does an investor derive value? Delhi-based retail investor Arun Kumar believes there is, if one researches properly. He subscribed to a mutual fund three years ago, which provided him a 20-year term cover. Supplementing this cover with another insurance, he believes he is adequately covered.

Indeed, while term-insurance covers are useful, schemes that offer genuine value are by their nature complex and sophisticated. “Such schemes are often not easily understood by consumers. And often the time and the effort needed are just not worthwhile for fund houses, which are happier selling more straightforward products,” says Value Research’s Kumar.

Moreover, such products also lock the investor into SIPs over longer time frames, sometimes up to 20-25 years. Here, the inherent differences between investment and insurance are highlighted.

Typically, investors look for liquidity in investments. The same is not true for insurance. Goel says: “If you stop paying your SIP instalments, then your insurance cover also lapses. Investment is something that one should do, but insurance is something that one cannot do without.” So, he says that schemes that may allow the insurance cover to continue even as investment stops could, of course, be useful, but that does not happen in most schemes.

Apprehension about hybrid products extends to ULIPs of insurance companies too.

How do the unit-linked plans of insurance companies compare with mutual fund products with insurance covers? The answer cannot be simplistic. As Rohit Sarin of Client Associates says, fund management philosophies governing a ULIP and open ended equity mutual funds could be different. “Unlike a mutual fund manager, a ULIP’s fund manager is driven by longer term investment performance, as there is no fear of losing assets due to poor performance in the short term.”

Sarin believes a ULIP is a convenient package for an investor who is looking for a mix of longer term investment and insurance and, therefore, is willing to accept a higher expense ratio for the same.

However, Sarin’s firm usually recommends separation of insurance and investment. “A combination of term insurance and equity mutual fund taken separately is more cost efficient for a client. Moreover, this approach allows the client to retain the flexibility of changing the fund manager, if required, instead of getting locked in with one for very long,” he says.

Does that mean hybrid products need to be junked? Not exactly. Goel says: “Hybrid products may be considered but the core of the financial planning has to be based on pure insurance and investment products.” The long-term investor who is primarily seeking investment play with additional insurance cover may invest in hybrid products, say financial advisors. This leads us to the crux of the matter—what are an individual’s financial requirements? And, this is a question that is best answered individually.

Hence, there are good and then there are indifferent financial products. Since it is your money, the effort to research whether they are worth investing should be yours alone.