Two mutual fund houses recently launched insurance features in their respective equity schemes. Rahul Jain of The Financial Express discussed the benefits and the caveats of the same with Zankhana Shah of Money Planner. Excerpts:What could be the prime objective for adding the insurance feature in an equity mutual fund scheme, considering the current equity market situation?
There is no link between the negative sentiment in the market and providing an insurance benefit. The insurance benefit provided in an equity mutual fund scheme is a type of risk management and also gives personal cover. This feature is a very cost effective way of getting insurance with no extra cost to the investor. It is lucrative for the person who is going to take a cover for first time.
Do you think addition of the insurance component in a mutual fund scheme is actually beneficial to investors? How?
Not really because it is not substituting insurance. Insurance feature could be different in each fund house. In case of Reliance MF the insurance ceases to exist after tenure completion. Term insurance would be better for the ones who are going for a higher amount. The objective of going for investment and insurance cover is always different. You shouldn't buy a unit-linked insurance product for investment and a mutual fund product for insurance. Investors should not go for a mutual fund scheme because it has an insurance benefit.
The insurance feature in the mutual fund is limiting to switch or redeem the units because if one does so before three years, then the insurance cover expires. Your cover is related to your investment. The same is true with ULIP, where if the investment is reduced, there would be a proportionate reduction in the insurance cover.
Does this feature make the product better than ULIP and can it replace ULIP, considering the high cost structure?
Yes, it can replace/substitute a ULIP product. In ULIP there are allocation and mortality charges, which are comparatively on a higher side. If a person wants a 10-lakh cover for a tenure of 20 years, one can invest Rs 10,000 per month to get that insurance cover. However, there is a limit of Rs 15 lakh or 20 lakh insurance cover provided, unlike in ULIP where you can take Rs 50 lakh insurance as well. ULIP is being sold on the basis of insurance benefit and not investment because people go for insurance first. But if you go just for insurance, your investment needs are not fulfilled and subsequently your goals cannot be achieved. One should go for investment first and then insurance but practically it is opposite in the market.
This insurance featured product is more beneficial to the ones who are new and would like to have relatively less cover due to income limitation. Hence, one can get insurance by not paying any extra amount. This investment is less attractive for high net worth individuals (HNIs), whose insurance cover can go above 20 lakh.
Does this feature have any hidden charges other than load expenses and will that make any difference in the returns parameter?
There are no hidden charges and also it is better on the returns parameter, considering the cost involved in ULIP. A mutual fund is much more regulated and so the fund house cannot charge more than the prescribed limit unlike insurance, which comes under Irda regulation.
According to you, which one is better, if one excludes insurance benefit, mutual fund plus term insurance or ULIP? Why?
If one excludes the feature or not, mutual fund plus term insurance is much better than ULIP. The most important, as I said above, is cost effectiveness and the other is the choice of more than one fund manager. Because you can buy more than one mutual fund scheme and get the benefit of various fund managers. In ULIP if you buy more than one scheme then your total cost of insurance increases, which is nil in case of a mutual fund.
How many fund houses have introduced this feature/benefit? Do you think more will come in the near future, considering more redemption due to the downward and volatile trend?
As of date, only two fund houses have come out with the insurance feature. We could see others coming into this fray to garner more inflows. This additional feature product is also important in financial planning for any person. One more thing to note here is if all the fund houses came out with insurance, then the investor can get a higher amount of insurance with no extra cost to be borne.
Source: Financial Express
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