SIP-cum-insurance plan: Your insurance is valid only while the SIP is active

Investors should ensure that they do not skip any payment as they face the risk of losing the insurance cover


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An agent from a reputed mutual fund company has been trying to sell me SIP-cum-insurance products. What exactly are they? Is it a good idea to invest in them? 

—Rhea Jagdev 

A few fund houses are offering systematic investment plans (SIPs) that provide the additional benefit of an insurance cover. 

Typically, such plans offer insurance with a sum assured that would be worth 100 times your monthly SIP amount, up to a maximum cap (typically around Rs20 lakh). 

The coverage could be lower in the initial years. There are no additional costs to the investor for investing in such SIPs and they are not subject to additional or different expense ratios. 

So, investing in such SIPs is not a bad idea for an investor. However, one should keep in mind a few things about this product or service. 

The insurance coverage is valid only during the time the SIP is running and stops when the SIP stops. 

The investors should ensure that they do not skip any payment for more than a month or they would face the risk of losing the insurance cover. 

There are a few other small-print disclosures involved, and I would encourage you to read them carefully before committing. The general word of advice in this regard would be to not choose a scheme for investment based on these criterion alone. 

If a scheme is a good scheme and it offers such an insurance cover, it would be a good idea to take it on as a bonus feature. 

Also, please note that the coverage has a maximum limit. Typically, most investors would need a higher coverage than provided by these limits and they should not treat this cover as the sole risk cover for themselves and their family. 

They should always have a solid term insurance plan as the main insurance cover for their family, in case something unfortunate happens.

What are hybrid funds? Are they different from balanced funds? 

—Atul Dev 

Hybrid funds are, as the word ‘hybrid’ indicates, funds that invest in multiple asset classes, such as: equity, debt, and gold. 

They should be contrasted with pure-equity funds (such as large-cap and diversified funds) and pure-debt funds (such as income funds and gilt funds). 

Balanced funds are a type of hybrid funds that invest mostly in equity instruments in the stock market. 

They are also called equity-oriented hybrid funds. Another popular type of hybrid funds are monthly income plan (MIP) funds, which invest mostly in debt instruments in the bond market. They are also called debt-oriented hybrid funds. 

Apart from these, there are also funds that invest in all three asset classes: equity, debt, and gold. 

In general, the risk level of a hybrid fund is proportionate to the percentage of equity holding in its portfolio. Thus, a balanced fund is considered riskier than an MIP fund. ‘Hybrid’ is just a term used to refer to all these different mixed-asset funds.

I have Rs45 lakh, which I have been saving for my retirement. I will retire in 2 years and want to use this money in a way that I receive monthly payments every month. Are monthly income plans of mutual funds a good idea for this purpose?

—Mukul Bhatt

Monthly income plans (MIP) are simply a common group name used for a category of funds that invest predominantly in debt instruments from the bond market. 

The portfolios of such funds typically have about 80% of the money invested in a diversified portfolio of debt instruments and the remaining in stocks from the equity market. 

In general, the main idea with these funds is to preserve the invested capital in the form of less-risky debt investments and they aim to provide returns from the equity portion of the portfolio. 

However, contrary to what their name suggests, neither do these funds provide a monthly income to their investors nor do they guarantee a steady return. ‘Month income plan’ is just an industry nomenclature and nothing more than that.

To address your problem, it will suit you well to invest in a portfolio of funds and employ the method of ‘systematic withdrawal plan’ (SWP) to cater to your monthly expense needs. Such a portfolio of funds need not be restricted to MIPs or even have such funds in them. Rather, it would suffice to invest in a conservative portfolio, which would consist mainly of low-risk debt funds and moderate-risk equity funds. 

A portfolio with about 80% allocated to short-term and ultra short-term debt funds and the remaining portion allocated to large-cap funds would be a good option. You can set up, in a proportional manner, SWPs from these funds on a monthly basis to cater to your expense requirements.

Srikanth Meenakshi is co-founder and COO, FundsIndia.com. 

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