The number of ceased systematic investment plans (SIPs) has almost doubled over the calendar year 2011 to 115,204, according to data provided by Computer Age Management Services (CAMS), a registrar and transfer agent to a number of mutual funds (MFs). An outcome, in all probability, of increasing market volatility. Ceased SIPs are those which are discontinued before their mandated time.
This forces us to say again that equity investing is most effective in the long run and SIPs are an ideal way to invest for you. With customers getting disillusioned with equity, fund houses are finding themselves under pressure. In a bid to garner long-term investment in MFs, some fund houses offer a bundled product that combines SIP investing and insurance, the latest to join is ICICI Prudential Asset Management Co. Ltd. But are these products worth your money?
What’s the product?
Just like you can opt for an SIP, you can opt for an SIP with insurance but this facility is available only with equity funds. The basic idea is to get you to remain invested and use SIPs as a true long-term investment tool. Asset management companies (AMCs) feel this can be achieved by adding insurance as it is by nature a long-term commitment.
As of now, only three AMCs are offering this facility—Reliance Capital Asset Management Co. Ltd, Birla Sun Life Asset Management Co. Ltd and ICICI Prudential AMC. The facilities are named Reliance SIP Insure, Birla Sun Life Century SIP and ICICI Prudential SIP Insure and are available with specified schemes.
DSP BlackRock Mutual Fund was one of the first fund houses to introduce this concept, but its product called Super SIP was available at the time of launch and had a structure where the investor would have to commit to an SIP for five, 11, 16 or 21 years.
The insurance part: It is a term cover, which simply gives a sum assured to the nominee in the event of the investor’s death. All other features like minimum commitment, age limit, exit loads and life cover are determined by fund houses separately.
Not an optimal cover: The limits on age and sum assured mean that this is not an optimal insurance product and should not be seen as such. For example, Reliance SIP Insure gives a cover of an amount equal to the balance of unpaid SIP instalments, subject to a maximum cover of Rs 10 lakh, which may not be enough for your insurance needs. The limits for the other two plans are also up to Rs 20 lakh, which you would get if you have an SIP of Rs 20,000 for at least three years and you have to continue the SIP thereafter. A life cover should be ideally 8-10 times your annual income.
Claims: Remember that you are dealing with the AMC for the investment but in case of the claim, you will have to deal with a separate entity, which is the insurance provider. Says Nimesh Shah, managing director and CEO, ICICI Prudential AMC, “We will facilitate the insurance through the SIP Insure facility through select 14 funds. However, the claim will have to be directly given at the designated branch of the insurance company.” The AMC can only guide you to the insurer, but can’t ensure payment of the claim.
Is there a fee?
The good part is that at present, none of the AMCs are charging any additional fee for the insurance part. So you pay only asset management charges as usual. But there are exit loads, which you will have to pay in case you redeem or switch out of your investment earlier than the mandated date so in that sense there is a penalty for premature withdrawal.
How do AMCs manage insurance cost? For the fund house, insurance doesn’t come cheap; the AMC basically negotiates a group term insurance cover for all investors under this facility and the pricing for insurance is done accordingly.
Typically, the annual premium for a 30-year-old for a term cover of Rs 10 lakh over 25 years is about Rs 1,300-1,500. Even though the expense will be cheaper per person in case of a group cover, this is not cheap for AMCs where thousands or lakhs of investors are concerned. Not every AMC can afford providing free insurance. Only those with large assets under management (AUM) and deep pockets will be able to absorb such high costs, which will add to the expenses on the AMCs profit and loss book.
Why haven’t they taken off then?
New concept: Says Sundeep Sikka, president and CEO, Reliance Capital, “This product is ahead of its time and is a novel concept. People will take some time to understand the benefits; right now they are wary of markets anyway. I believe it is only a matter of time for people to embrace products such as this.”
Distribution incentive: At a basic level, a distributor stands to earn more if he sells a simple SIP and a Rs 10 lakh term cover separately. Equity MFs can earn her an upfront commission of around 75 basis points, while the term insurance can earn up to 40% of the premium paid.
Given that the commercial incentive for the distributor to recommend and explain this product is not much, that maybe a roadblock. So unless interests are aligned to only one objective—long-term investment—this is a push product.
Says Dhirendra Kumar, chief executive, Value Research, a mutual fund tracker, “That is true, but there is still a segment of investors that can be converted to invest in SIPs through this kind of an added feature and that’s where distributors will also find value.”
Lakshmi Iyer, head (products and fixed income), Kotak Mahindra Asset Management Co. Ltd, says, “The community of independent financial advisors or IFAs is fairly comfortable with the product. In fact, for us it was distributor feedback that gave birth to the product.” Kotak AMC used to have a facility called Star Kid which offered a similar SIP-cum-insurance facility across some of its equity funds. It was a bit different as the investor necessarily had to nominate a child as the beneficiary, one of the reasons which limited the sale of the product, which has since been withdrawn.
Is it susutainable? But remember that for the insurance provider, giving group insurance to a mixed group of investors means that it is difficult to assess risk. Basically, insurers set the premiums after assessing risk, so if they don’t know the group of people they are going to insure, it will be difficult to tell whether the premiums charged are accurate. While this doesn’t impact investors, it might make it unsustainable for the AMC to include insurance as a free benefit. Also, earlier this year, in a discussion paper, the Insurance Regulatory and Development Authority (Irda) expressed concern over bundling of insurance with other products, especially financial services. Among other issues, one of the concerns was also the manner of advertising the combined product, which can lead customers to believe that insurance is the main feature of the product, which is not the case.
Mint Money take
At no additional cost to you, this sure seems like a bonus to cover with your equity investment. But there is a huge caveat here—be clear that you are investing for the equity part and not for insurance. Says Sikka, “We are very clear that Reliance SIP Insure is not a substitute for insurance or a term cover. It is clearly an equity offering with the cover serving to protect the investors balance unpaid SIPs.”
If what you want is a cover, this product is not for you. Says Kartik Jhaveri, founder and director, Transcend Consulting (I) Pvt. Ltd, “We like to keep mutual funds and insurance separate. In these products there is an exit load and the cover may or not be adequate.”
Also, remember the exit loads. If you are to invest in one of these funds, make sure you continue the SIP for at least three years. But keep in mind, long-term investing doesn’t mean only three years, but can extend to five, 10 years or more and only then will you see the benefit of investing in equity.
Also See | What’s on offer (PDF)
PDF by Yogesh Kumar/Mint