LoanRaja Blog- Personal Finance Guide

There has been a flood of guaranteed return options from insurance companies but check out whether it meets your long term needs. Wealth creation needs more money and period through fixed return products.

You just need one year of weakness in equity markets for investors to rush for guaranteed returns. Forget the investor, even product manufacturers (your mutual funds, insurance companies and the like) are rushing in with structured products which offer the comfort of fixed returns. While downtrend is the best time to accumulate in an equity market, investors invariably end up looking at debt during the downtrend and vice-versa.

Now, take the case of two leading insurance companies which have come up with guaranteed returns on their insurance schemes. While LIC has launched Jeevan Aastha, a fixed return product, ICICI Prudential has launched a fund, RGF, with the buy-back option of first year premium on four of its schemes. In the case LIC, the product is one-time premium and comes with tenure of 5-10 years. The product offers guaranteed return and loyalty return and the effective yield is projected to be around 9%. Since the product also comes under tax saving option under Section 80C, there has been an unusual rush among investors for the product. The product is being pitted against fixed deposit which is far less tax efficient because of tax on interest income. Interestingly, the pamphlets of insurance advisors project the superior benefits of the product vis-a-vis FDs and hence, investors have been made to believe that the insurance plan offers superlative returns. In fact, some of the advisors on the blog claim an annualised returns of 17% for the scheme!

Countering LIC’s plan has been ICICI with its latest fund, RGF (return guaranteed fund). This fund, which is more of a feature for four of its insurance schemes, offers a guaranteed return of slightly over 8%. The company promises to buy-back the first year premium at an NAV of 15 after five years from the date of investment. If the NAV happens to be higher than Rs 15 at the end of five years, the actual NAV would be applicable for the investor.

If an investor signs up for an insurance policy for a term of five years, he has the option of choosing for RGF for first year premium and can opt for change of fund for the remaining four years of premium paying period. The investor, however, need not worry about the choice of fund immediately and can take the call on investment option at a later date. The basic idea behind the fund is assuring the investor of returns in a year where equity has proved to be volatile. With the coming year too being expected to be volatile, the investor may feel comfortable with guaranteed return products.
Suitability: the assured return products are suitable for risk-averse investors and for those who are looking at the prospect of protecting returns. Hence, investors who are looking at parking large sums in the first year can opt for such products. On the other hand, the product may not serve the purpose for young investors as they need to look at options which have the potential of creating wealth. With guaranteed returns, either it would take longer time or investors will have to park larger sums for building wealth. More importantly, equity is closer to its three year bottom and chances of equity providing single digit returns from current level is limited. For instance, even at current market levels, five year returns from equity outperform debt products. Take all of these options keeping in mind the risk-reward ratio which is loaded in favour of equity at present.

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.