LoanRaja Blog- Personal Finance Guide

These are tough times for investors and the choice of investment product has become challenging. One good alternative that stands out is HDFC unit linked funds; while not many have the funds to worry about investment options, HDFC stands out because of the liquidity crisis and uncertain economic conditions; there are some good options for those sitting on cash. While insurance in general has become more appealing than earlier, there is an interesting product from HDFC Standard Life. The HDFC unit-linked wealth maximiser plus, is a scheme which can be considered by those sitting on larger corpus.

As the name suggests, HDFC fund is a market-linked product offering both insurance and market-linked returns. However, the premium in HDFC option is restricted to one time and hence investor will have to look at parking larger corpus. Some of the interesting features of the HDFC product are lower allocation charges when compared with ULIP, tax-free maturity benefit and the advantage of life cover up to 99 years.

To put the HDFC product features in a nutshell, maximiser is a single premium insurance plan with ULIP features. Hence, an investor gets to choose the HDFC fund for his premium amount and also can decide on the life cover. However, the cover is only for a maximum of 5 times unlike an ULIP which allows as much as 40 times, subject to age of the investor.

As a result, the HDFC product can be another alternative option for an investor looking for term plan or pension plan. In the case of term plan with guaranteed premium, the investor gets back only the premium paid by him. For such investors, the maximiser can be a better option as it also offers the potential of appreciation. Take for instance, an individual looking for a cover of Rs 25 lakhs. This investor can look at a one-time premium payment of Rs 5 lakhs under the HDFC Maximiser and can also hope to earn over and above the premium contribution. In a pure term, either he will have to go forego the premium or opt for return of premium. Also, the cost of a term plan depends on the term which is not the case under the HDFC Maximiser product as an investor can enjoy the life cover up to 99 years.

It can also be an alternative for pension planning as the HDFC fund offer the freedom one time payment. Since the investor has the option of keeping the life cover to a minimum of 1.1x of the premium amount, the cost towards the HDFC policy can be lower. For instance, if an investor chooses to invest Rs 25 lakhs at one go, he can keep the life cover to the minimum, as he would be able to earn higher returns from the investment.

The biggest advantage of the HDFC product is with respect to its premium allocation charges. The charges are competitive at 2% for premiums in the range of Rs 5 lakhs to Rs 24.99 lakhs. It comes down even further for higher premium payments.

The HDFC product also has other flexible features as offered by ULIP such as switch from one fund to another, flexibility of withdrawal and pre-mature conditions, etc. The only drawback is that the HDFC product does not allow accumulation over a period of time as it is a single premium product and also investor can not choose life cover beyond five times.

As time flies, a thought crosses my mind; how is an investor affected by financial crisis and who can he seek for investment tips? Now for instance would you expect a kiranewala to talk about financial crisis? Last week, I walked into a store to pick up a gift and handed over a Rs 500 note to the shopkeeper. The man didn’t have enough change to return to me. While that is nothing new in a city like Bangalore, what puzzled me was his reply. He cribbed that due to the slowdown in the US and financial crisis, consumers everywhere were going slow on their purchases and business was low during the last few weeks. Going further, we will talk on some investment tips to face this financial crisis.

If a shopkeeper who is not even an investor dealing with small value items is complaining of slow-down and financial crisis it is a clear indicator of the state of the economy. So how does one understand the outcome of financial crisis and how the investor is affected? The stock markets were the early birds to forewarn us by slipping into reverse gear since February and it has been tough for investors to find avenues for products which give good returns. On the other hand, the growing uncertainty at the work place for the salaried class, lack of business growth for the self-employed has forced everyone to change the investment strategies. At this hour, not only one needs to focus on liquidity but investors should also remember the fact that wealth creation is a continuous process and not something done only during boom times. Here, are some tips which can help you tide over the current financial crisis but also help you make a good opportunity of the environment.

Be Liquid during Financial Crisis:

The Investment tip here for investors in the current environment as every investment product has failed to offer stability during this financial crisis. At the same time, different markets have also been offering good investment opportunities for long term investments and hence one needs to have the liquidity to take advantage of the situation. For instance, equity market has failed to sustain intermittent relief and on the other hand, has been presenting buying options in blue chip stocks at regular intervals. Similarly, property too has been going through the phase of corrective mood and investors with long term focus can look for their choice.  However, for being liquid, one need not hold on to cash and instead, the money can be parked in fixed deposits or liquid funds.

Invest in a Systematic way: As pointed out earlier, equity markets have been volatile in the last few quarters and hence, look attractive for long term investors. However, investors need not rush to pick up at one go and instead, the investment process can be over a period of time. There are two ways of going about the staggered investment strategy. The well-known investment tip is to sign up for an SIP in an equity fund and keep buying units in a mutual fund on a monthly basis. The other option is to invest at one go but still take advantage of staggered accumulation through STP. In this option, an investor invests a lump sum in debt funds and transfers a fixed sum into an equity fund on a daily, weekly or monthly basis. The concept is similar to SIP but the biggest difference is that investor can still enjoy the benefits of SIP with one-time investment. Another added advantage is that mutual funds allow STPs even on a daily basis which can make a huge difference over long term. For instance, an investor can park Rs 2-3 lakhs in a liquid fund at the beginning of year and transfer Rs 1,000 to an equity scheme on a daily basis. For STP, the choice of equity funds can be more than one fund too.

The accumulation strategy need not be restricted to mutual funds alone. Even with respect to stocks, buy them in small lots. However, buying has to be planned carefully and you also need plenty of patience to get the acceptable price for your stock.

In the last couple of months, mutual fund companies have been trying hard to attract fresh investments. Mutual funds aim being Systematic Investment Plans popularly known as SIP’s. Mutual funds strategies are understandable considering that equity market has eroded the gains of last few years in a matter of few months. With the stock market hitting new low, fresh investors have been a little concerned about their investment strategy, option being mutual funds, though they should be actually looking at equity at current levels with a long term strategy. However, fresh investments should be in a staggered way and systematic investment planning (SIP) perfectly does the job as it allows the investors to take advantage of market volatility. Now there is an additional carrot for investors to look at SIPs as mutual funds are offering free insurance.

The product, Mutual fund SIP insurance, is the new word in the mutual fund sector these days and as the name tells you, investor gets insurance cover for his SIP investments. At present, the mutual fund product is being offered by select funds like Reliance and Birla but it may not take long for others follow suit. The big advantage for investors in the scheme is that insurance cover is being provided free of cost and is dependent on the instalments and the value of SIP. For instance, if an investor signs up for a monthly SIP of Rs 5,000 for the next five years, his outgo would be Rs 3 lakhs over a period of five years and the mutual fund is providing life cover of Rs 3 lakhs under the scheme. In the case of Birla Mutual fund, the cover is 100 times the SIP amount.

The SIP insurance product, however, has its own set of catch lines. For instance, mutual fund houses have pegged the insurance cover at certain limit and the life cover feature is not available to all schemes though most schemes are covered. In addition, the eligibility age too is not beyond a certain limit and in the case of Reliance Mutual Fund, the maximum age for an investor is 45.

Despite these shortcomings, the mutual fund product is not a bad deal as the insurance cover is being offered without extra cost. Also, since insurance amount on mutual funds is invested in the event of death, the investor is in a way ensuring future contribution for his family. For instance, an investor with a death benefit of Rs 3 lakhs cover dies before the completion of tenure, the death benefit is transferred to the corpus of the investor and would be paid on maturity to the nominee. However, the nominee also has the option of not continuing with the policy and can take back the policy amount. In such instances, the Mjtual Fund SIP would get terminated.

Investors who are looking at Mutual Fund SIP in the current market environment can look at schemes which offer SIP insurance as it can improve the overall life cover for the investor. However, the feature should be viewed as an additional feature and should not be the main driving force for your investments. In fact, the product had faced obstacles earlier as it was referred to insurance regulator, Insurance Regulatory & Development Authority of India (IRDA). Obviously, the insurance companies had felt threatened as investors were being doled out free insurance. In fact, Mutual fund SIP insurance is similar to ULIPs where the primary objective of the later is to provide insurance cover and returns are secondary. Similarly, Mutual fund SIPs which carry insurance cover need to be looked at for their ability to offer returns. Hence, if the scheme of your choice does not offer the feature, don’t dump it.