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Nov 7 2011 3:32PM
Do not buy a fund only to get free life insurance

With small investors exiting in large numbers,mutual fund houses are trying to lure them with gimmicks. We examine two such offers.At first glance, the SIP Insure plan from the Reliance Mutual Fund and the Century SIP plan from Birla Sun Life Mutual Fund appear unbelievable. If you start an SIP in any of the specified equity or balanced funds of the Reliance Mutual Fund, your SIPs are insured by the fund house. If something untoward happens to you, the fund house will pay the remaining SIPs on your behalf and give your nominee the corpus on completion of the investment. In the Century SIP from Birla Sun Life, you are covered for 10 times the SIP amount in the first year, 50 times in the second year, and 100 times from the third year onwards. The NRIs and PIOs living in 45 countries can also invest in the Century SIP scheme.There is a good reason mutual funds are resorting to such gimmicks. According to the latest data released by the Association of Mutual Funds in India (Amfi), 5.4 lakh equity folios belonging to small investors closed down between 1 April and 30 September this year. Also, despite efforts by the industry and the market regulator , small investors are redeeming their equity funds far too soon.Since small investors(defined by Amfi as individuals investing up to 5 lakh) account for over 67% of the investments in equity funds, fund houses are trying everything to retain investors , and if free life insurance can get them to do so, then so be it. Too many conditions A closer examination reveals the warts in the free insurance offers.The Reliance SIP Insure plan must be continued for the entire term if you want the insurance cover.If you redeem (even partially), switch or stop investing , the insurance cover ends.Also, you wonot get any cover if you miss two consecutive SIPs or four during the entire tenure.In Birla Sun Life, if you stop investing within three years of starting , the cover ends. If, however, you have invested for three years and donot withdraw the sum, you will get a cover equal to the fund value at the beginning of every year. The insurance cover will continue till you withdraw the investment or till you are 55 years old, whichever is earlier.False sense of security Donot let the cover lull you into a false sense of security.Under the Reliance offer, the maximum cover is 10 lakh, but an investor with a monthly SIP of 5,000 for five years will get a cover of only 3 lakh. This too will become progressively smaller with each passing month because the insurance is only for the unpaid SIPs. The Birla Sun Life offer is relatively better, but even this should not be seen as a replacement for a proper policy from a life insurance company. A monthly SIP of 20,000 will get you a cover of 20 lakh from the third year onwards. Why should one go through this rigmarole for something that costs less than 4,000 a year?Be choosy while investing The good thing for the investor is that he has nothing to lose. If the scheme performs well and helps him reach his financial goal and the fund house is giving him free insurance till he continues his SIPs, there is no harm in buying it. He is under no compulsion to buy it. The only glitch is that there is an exit load on premature withdrawals. Also, keep in mind that only investments in certain equity and balanced funds are eligible for the free insurance offer. Given that you canot switch out or end the investment without losing the insurance cover, it is important to choose schemes that have the potential to give steady returns over the long term. So steer clear of thematic funds and sectoral schemes that do well in some market conditions, but cannot sustain the momentum in the long term.
 
 
 
 
 
 
 
 
 
     
 
     
 
 
 
 
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