Yet another series of phone calls from his relationship manager got Pankaj Nikam, a senior media executive, perplexed. Another mutual fund scheme was being pushed down his throat, this time with an insurance policy sweetener attached. After listening to the relationship manager with his wealth management firm, Nikam was sorely tempted to go for it. Like Nikam, there are several investors who are now being offered insurance policies with systematic investment plans (SIP), of mutual funds.

But then this is not a new offering. UTI (then Unit Trust of India) had started offering these schemes three decades ago. Even DSP Merrill Lynch launched the ‘Super SIP’ in 2005-06 to provide insurance benefits up to 240 times of the SIP amount.

Moreover, some fund houses also provided fixed accidental benefits on the amount invested. Now, with equity funds not attracting the huge investor attention that it did in the previous year, fund houses have started attaching these additional benefits.

“These schemes have been created not only to get investors back to equity funds, but also compete with unit linked insurance products,” says Amar Pandit, a certified financial planner. However, before signing on, there are certain things you should be aware off.

One of the factors is clearly whether the insurance component can substitute unit linked insurance products (Ulip) and term insurance products provided by life insurance companies? What are the benefits, conditions and caveats?

Some differences

First cut, Ulip products give you insurance benefits, which are usually five times more than the annual premium amount. But, it comes at cost. You will have to shell out allocation and mortality charges, which could be as high as 30%, in the first year. Therefore, investing in Ulips should be looked at from a long-term perspective – say around 10 years, reckon experts.

Mutual fund products with insurance benefits, on the other hand, have a much lower entry and exit load. And this is the feature that is the unique selling proposition used by fund distributors. “The added insurance feature, it could entice investors, irrespective of the turmoil situation in the equity market,” says a distributor not wanting to be named.

However, before taking the plunge, one must look into details of every fund because everyone could give insurance benefits in different ways. Recently, two fund houses, Reliance and Birla Sun Life Mutual Fund (Birla MF) have started adding the insurance feature in their existing equity schemes.

Last year, Kotak Mahindra Mutual Fund launched the same insurance benefit termed as Kotak Star Kid, linked to children’s education in its two schemes, Kotak 30 and Kotak tax saver. The life of either of the parents is insured but the child has to be the nominee. It has a higher entry load of 3.25%, as compared to 2.25% to 2.50% generally offered by other funds.

Other than this, there is the recently relaunched UTI ULIP, which is a balanced scheme that invests in both, equity and debt (40:60). It is quite similar to an ideal Ulip product. Investors have to pay a premium for the life insurance cover; however, it is comparatively lower than a Ulip.

One can choose insurance from two options. Fixed term, where the life coverage remains same and declining term, where it reduces during the entire term of the policy. (See table for more details). Due to this, the returns have been just above the fixed deposit rates since the last five years.

The new insurance feature launched by two fund houses is offered to the ones opting for a systematic investment plan (SIP) for at least three years and not for a lump sum.

It has been specially launched to inculcate the habit of regular investment for the long-term and helps to complete planned investments. Nonetheless, life insurance provided by mutual fund companies is free of cost.

The objective is to provide an insurance benefit if the holder dies in between the tenure of the SIP. However, there is a limit of Rs 10 lakh and Rs 20 lakh, depending on fund houses, to avail the insurance, unlike Ulip or term insurance, where the insurance can go upto 50 lakh.

The sum assured calculation is also different among fund houses. Exiting before the three year tenure attracts an exit load of 2%.

Selective gain

The fact to be noted is that most of the schemes have a cap on the insurance cover that you could get. Usually the cap is around

Rs 10 – 20 lakh per investor, depending on the fund house.

Then again, there are schemes that limit your cover till your SIP is active. Others offer a longer tenure. You have to be careful while selecting the scheme of your choice.

In case you want to stay with mutual funds and have a larger cover, you could choose different fund houses and increase your cover. ‘You can also get the benefit of more than one fund manager, which is not in the case of Ulip, as the cost of insurance increases if number of schemes go up. One should go for investment first then insurance, however practically it is the opposite’ says Zankhana Shah, financial planner.

Your cover ceases the moment you switch or redeem. ‘With regards to additional benefit over and above insurance, mutual fund houses should continue to provide insurance benefits if anyone switches between schemes with the same fund house, which is not provided?

says Pandit. Overall, these schemes are suited to those who are starting of. For established and experienced investors, it is better to go for a term insurance or Ulip, where there is no upper-limit on coverage.

As most savvy financial planners would say, get an insurance product for insurance, and an investment product for investing. Mixing products might not be a great idea.