SUBSTITE FOR TERM PLAN???

INTELLIGENT(?) INSURANCE INVESTOR

One reader of my blog Raj sent me this letter
Hi Srikanth,

Can you guide me on this ULIP doubt. I am 35yrs of age and I have a ULIP from Metlife(Met Smart Premier) which covers me for 100 yrs with a sum assured of 20 Lacs. My annual premium is one Lac. Minumum premium payment period is 3 yrs as with most ULIP's.
Since the objective is to keep investment and insurance separate, I plan to make premium payments for the first 3 - 4 yrs and leave it to grow till the 5th year. At a very conservative rate I expect a return of 5% p.a at the end of 5 yrs. If I pull out my money leaving back one annualized premium (1 lac), I am still covered till 100 yrs of age without paying any more premium. I expect the amount that I have left behind to suffice the policy expenses till the age of 100. Net to net, what I spend for an insurance cover of 20 lacs till 100 yrs would be far far less than what it would be for a term policy. I guess Metlife has discontinued this policy and no more new policies are opened under this scheme. I am not sure if there are other ULIPS that give 20 times cover. If there are I would be interested in opening another one. How is my idea???

Raj




SRIKANTH MATRUBAI replies :

Dear Raj,
You are playing with fire. Already you are on the wrong side of the age. As the policy in question is Type - 1 ULIP, & as per your own admission, you are planning to withdraw money after completing 5Y up to the extent that fund value equal to 1Y premium remains there.
The basic problem is with your thinking................................................
The moment fund value decreases below the 1L figure, the policy will be terminated with immediate effect.
Now let us see how this will happen - As there is no more extra money so the sum at risk is always around 19L Rs. for the ins. co. (20L basic sum assured - 1L fund value) now as the person ages, his mortality charges 'll keep on increasing & in case the market is not favorable, the fund value 'll come down below the 1L figure very easily. Rest you can guess!!!!

From the query, it seems you want to run this policy as a substitute of Term plan. Well well well. Even in this case, there are too many problems. I don't see any merit to run a cover for age 100. While you are comparing the non productive term cover premium (as per your own admission) to your own calculation that keeping 1L fund value in this ULIP is a better option, you are missing the point, that you are paying upfront 1L Rs.

In my view if you are opting Aegon Religare I-term plan for maxium possible term of 25Y, the annual premium will be around 5K Rs. for 20L cover from now onwards & invest remaining 95K rupees in a good funds like HDFC top 200/DSP Eq., Reliance Growth Fund, etc (you can go through the list in other articles in this site) the final outcome will be far far better than what you are planning to opt for at present.

Regarding the non issue of new policies of this class, the same are banned due to IRDA's guidelines of capping of charges.


Regards,
Srikanth Matrubai

P.S.
Dear Raj,
You need to read your Policy Document, in the case of premium holiday.........
Premium Holiday
The Policyholder is however entitled to submit a written notice to the Company within the period allowed for the reinstatement of the Policy opting to continue the Policy provided 5 full years premiums have been paid. The Company will continue deduction of applicable Policy Charges and keep the Policy in force until the Fund Value does not fall below the amount equivalent to the Sum of 120% of Annualized Regular Premium of the Basic Plan and applicable Surrender Charge. Switches and Partial Withdrawals are allowed during this period, subject to satisfying the applicable criteria for the same.
Where the Fund Value falls to the level of an amount equal to the sum of the 120% of Annualized First Year Regular Premium of the Basic Plan and applicable Surrender Charge or the Fund Value is inadequate for the deduction of the applicable Policy Charges whichever is earlier, the Policy shall stand Terminated and the Surrender Value, if any, shall be paid.

Either you hasn't read your policy document or you are an another victim of MIS SELLING.




thanks to dear Ashalanshu for invaluable inputs.

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ONE STEP CLOSER TO KILL THE MUTUAL FUND INDUSTRY

Dear Friends,

I am in receipt of the latest circular with regard to the Fee Structure for ARN registration and renewal. It is a shocker to the entire Mutual Fund distributor community.

Currently, individuals and corporate employees are required to pay Rs250 as renewal fees. AMFI has drastically increased it to Rs2,500, which is a hike of 900%. However, an individual seeking a new ARN number will now have to shell out Rs5,000 as registration fees.

After the recent changes brought out by SEBI the earning of the MF distributor has come down by more than 80% but the latest fee structure announced by AMFI is seeing an astronomical jump of 900%. I dont understand the logic behind this move. This apart the distributor has to pay for the exam fee too.

Till date I was of the opinion that AMFI is an association which represents the cause of the mutual fund Industry. I was also of the opinion that AMFI is a non-profitable institution but the latest circular on fee chargeable for ARN registration and renewal from Amfi disproves this status.

When the industry is reeling under lot of uncerternity in terms of present and future business the MF trade body instead of finding ways and means to save the industry and its partners is trying to make profit from fee payable by its partners. Is this justifiable?

Already 32 % of IFA s are already out of the business, we are sure that amfi doesnt want more IFA's to be out of business.

It appears that the AMFI and the AMCs are working in tandem to wipe of intermediaries from the business of selling investments.

So long, the AMFI and AMCs needed us and now that they believe that they have fairly established their business and created a vast data base of investors, they are confident of selling investments comfortably, sending mails and news letters.

The ARN issued to the examinees (in this case the MF advisors) should be for life time of the advisor, as in any case, the advisor will keep himself posted of the developments in investment sector, else, he loses his clientle.

Is AMFI working so naive that they dont appreciate the contribution by the advisors?

With the mutual fund (MF) industry bogged down by a number of problems, the decision of the AMFI to hike ARN renewal fee is likely to prevent new independent financial advisors (IFAs) from entering the market. Needless to say that for the Bank and Institutional Brokers paying Rs. 5000/- will be peanuts. Besides it serves the purpose of killing competition to an extent.

Everyone were of the opinion the new team under Mr. Sinor will do something for the MF Industry but now they have done something for safe guarding their bottom line. Nobody is bothered about the nascent industry called Mutual Fund. In a scenario where there is no proper incentive for the distributor to market Mutual Fund products this move of Amfi will further kill the industry.

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SUPER SIP FUNDS

Here is a short list of some selected funds which have given excellent returns





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DSP BLACKROCK FOCUS 25 FUND - DOUBLE EDGED SWORD???

FOCUSSING ON 'ALPHA'

FOCUSSING ON “ALPHA”

DSP BLACKROCK has come with a New Fund Offer (other than the FOFs) after nearly 4 years. And it has come out with a Exciting Fund called DSP BlackRock Focus 25 Fund.

Unlike DSPBR Top 100 Fund which is restricted top 100 companies by Market Cap., this Fund has the entire gamut of stocks to choose from and thus could provide an Alpha.

The Fund aims to invest the core of the portfolio in Large Caps and balance in multi caps in the Top 200 market cap companies. The Fund Manager has indicated that he intends to have largest exposure to Banking and Financial services as the outlook appears bright for the sector.

The new DSP Blackrock Focus 25 Fund aims to distill the best of the fund house's stock picks in a concentrated portfolio of high conviction bets.

And yes, being a concentrated portfolio, the Fund will have a potentially higher risk/return profile than a diversified fund.

Surprisingly, the Fund has chosen SENSEX as its Benchmark, whereas BSE200 would have been more appropriate.

The fund will be managed by Apoorva Shah who also manages two 5 Star Rated Fund, namely DSP BlackRock Equity Fund and DSPBR Top 100 Fund which has been a very consistent performer. A clear reflection of the stock picking ability of the Fund Manager.

The fund is positioned in between a pure thematic fund and a diversified fund.

It is a known fact that concentrated portfolio mutual fund schemes often produce outstanding results. These funds tend to raise and fall more than the market and other diversified equity funds.

RECOMMENDATION :

While on the face of it, the Fund looks to be a Double Edged Sword, the pedigree of the fund house gives comfort.

First Time Investors., this Fund is NOT for you. You have better options available.

Investors with reasonable risk appetite could look at taking a bet in this Fund. The fund has potential for high returns, albeit with high volatality due to its limited diversification and should be avoided by conservative investors. Investing through SIP is highly recommended to get advantage of the high volatility this Fund is expected to have. Avoid Lumpsum investment., unless you are following it up with SIP.

Ideal for long term rather than short term.

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FT DYNAMIC FOF - AUTO TIMING THE MARKETS

Want a Fund which automatically books profits when the markets are overvalued and enter the markets when they are cheap???

Then, the Franklin Templeton Dynamic PE Ratio Fund of Funds is the fund for you.

Franklin Templeton Dynamic PE Ratio Fund of Funds is one of those rare funds which has an universal appeal and should be in portfolio of every investor.

This is a Hybrid fund which moves into equity and debt in a automated manner.
The Fund protects downside and behaves conservatively because of its mandate.
In another words, the fund automatically rebalances its asset allocation.

Its return since launch (October 2003) is 22.39% and 5 year returns is 22.19% comfortably beating its Category of 14.65%.

The most comforting factor is that the Fund fell by only 25.7% in 2008 when most funds were falling in the range of 70%-80%.

The returns have been on par with Equity Funds without giving you the jitters and volatility associated with Equity Funds.

The Fund, being a Fund of Funds invests in two of its in-house funds, Franklin India Blue chip fund, an Equity Diversified Fund and in Templeton India Income Fund, a Debt Fund.

ASSET ALLOCATION:
The Fund Manager, depending on the PE of the Nifty, increases/decreases his investments in these two funds.

The Fund increases its equity exposure as long as the PE of the Nifty is below 12% and gradually decreases as and when the PE of the Nifty rises and in a rare case, wherein the Nifty PE rises to above 28, the Fund acts like a Debt Fund with equity exposure being less than 10%!!!!!

The reverse happens, when the Nifty PE keeps falling, the Fund increases its Equity weight age gradually.

When the Nifty had plunged to 8000 levels (PE of 12) in March 2009, the Fund had an equity exposure of 91%!!!!

The Fund has beaten even the Balanced Funds comfortably across market cycles.

The only negative about the Fund is, it invests only in its in house funds. Also, if the markets remain bullish for a longer time, the Fund will fail to capture the gains, due to its PE strategy.

The Fund, which dynamically allocates between equity and debt, is apt choice for investors who want to have equity exposure but are shy of risks and volatility associated with it.

Those of you investors, who have no time for asset allocation, should seriously consider having this fund in your portfolio.

Regards,

Srikanth Matrubai
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