Looks like a small beginning is being made. Kotak Mutual Fund has launched Kotak Star Kid, a facility in which mutual fund and insurance come in a single package.
MUMBAI: The two biggest problems facing mutual funds in India seem to be their inability to pay high commissions to their distributors like insurance companies and the lack of an insurance feature in their schemes.
Insurance companies have been very successful with their products because of the insurance and investment combination that they have offered through their unit-linked insurance plans (Ulips). This despite the fact that returns generated by most Ulips have largely lagged mutual fund returns.
Only if mutual funds would learn a thing or two from insurance companies and offer an insurance cover along with their schemes, they would be more popular among the retail investors.
Looks like a small beginning is being made. Kotak Mutual Fund has launched Kotak Star Kid, a facility in which mutual fund and insurance come in a single package.
The way it works is very simple. The facility allows you to invest through a systematic investment plan (SIP) on a monthly basis in either Kotak 30 or Kotak Tax Saver schemes.
The mutual fund also plans to add Kotak Opportunities Fund, currently its most successful scheme, to the list of schemes on which the facility is available.
An individual can invest a minimum of Rs 1,000 every month and has an option to choose an SIP over a period 5 years, 10 years, 15 years or 20 years. To come to the insurance benefit, at any point of time, the cumulative unpaid SIPs after one year are insured.
“SIPs are the best way of achieving a long-term goal and incase something goes wrong we will give the remaining unpaid SIPs,” says Sandesh Kirkire, chief executive officer, Kotak Mutual Fund.
Let us say an individual chooses to take the SIP option of 15 years and invests Rs 5,000 every month over that period. After completion of one year and having invested in the first 12 SIPs, if the individual dies, then amount for the remaining SIPs would be handed over to the child nominee ( in case the nominee is still a minor then the immediate legal guardian).
So, in this case the SIPs would have been paid for only one year. Hence the SIPs for the next 14 years would have remained. At the rate of Rs 5,000 every month or Rs 60,000 ever year, the total amount for a period of 14 years, works out to Rs 8.4 lakh (Rs 60,000 x 14). This is the amount that Kotak Mutual Fund will hand over to either the child or the legal guardian if the child is still a minor. Other than this, the child or the legal guardian can also withdraw the amount that has accumulated in the investment fund till date.
However, as they say, there are no free lunches. The insurance comes with an extra cost. The extra cost in this case is in the form of a higher entry load of 3.25% of the amount invested. The entry load in other cases tends to be 2.25%.
“The product looks very attractive for individuals who have some kind of financial goal. They can ensure that they achieve that goal, by just paying an extra 1% entry load and thereby insuring the unpaid SIPs. It’s a very small risk premium to pay for the insurance you get,” says Suresh Sadagopan, a certified financial planner, who runs Ladder 7 Financial Advisories.
If the individual dies within the first year (after the first 30 days) of taking the policy, the amount of insurance is limited to ten times the monthly SIP, which in the example taken above would work out to Rs 50,000. Also, at the time of opting for the facility if the insurance cover goes beyond Rs 10 lakh then the individual needs to undergo a medical examination. For a cover of up to Rs 10 lakh, the individual taking on the facility will have to give a good health declaration. The maximum insurance cover is limited to Rs 1 crore.
So can we expect more mutual funds to come up with such facilities in the future? “The disadvantage with Ulips is that there is no way you can find out which is the best performing Ulip in the market. In mutual funds there is no such problem. So, if by giving out insurance with our better performing schemes, if we can get more people to invest, it is an idea worth considering,” says a fund manager requesting anonymity.
k_vivek@dnaindia.net
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