The Hindu Business Line : DSP-ML's Super SIP

SUPER SIP — a product that combines systematic investment plan with insurance. One could really go on and on about the virtues of the product. First, it extracts a commitment from the investor about long-term investment through equity mutual funds — by far one of the best available means to build wealth. If he misses five instalments he loses insurance cover.

Second, there is transparency on the cost of insurance. The cost stays the same through out the investment period, in contrast to Unit Linked Insurance Plans, where the cost of term insurance may be revised. In addition, cost of management promises to be lower than that for the ubiquitous unit-linked insurance plans.

There are two options offered to investor. One is variable insurance cover and fixed insurance cover. Variable insurance cover will, after the first year, provide unpaid monthly instalments in the event of death of the investor.

Fixed cover offers 240 times the monthly instalment as cover throughout the investment period. The entry age is between 18 and 43 for this product. The scheme is open only for 45 days.

No tax cover: One wonders why insurance companies have not come out with a product that is as competitive. This is because, for all the virtues of Super SIP, there are limitations associated with the product. It would have been a far better product if Bajaj Allianz, the insurance partner for Super SIP, had offered it.

The terms of offer could have come with the caveat that investments would be made in specific equity schemes of DSP-ML.

Such an arrangement would have provided tax rebates on the amount invested which, in Super SIP, does not qualify for a tax rebate. This poses a problem for a young investor who has investible surplus of less than Rs 1 lakh.

The insurance cost in this product, however, still compares favourably with that of standalone term assurance product. For fixed insurance cover, Super SIP charges an entry load of 5 per cent. This is the cost of insurance.

For instance, for a 30-year old, under the fixed insurance cover, the cost of term assurance under Super SIP would work out to Rs 5,000 for a sum assured of Rs 24 lakhs. Premiums offered by LIC and Kotak, among the most competitive on offer, are above Rs 8,000. Even after considering tax rebate of 20 or 30 per cent, the cost of insurance works out favourably.

For a non-smoker, a very competitive term assurance plan is available from Kotak. A non-smoker under the age of 30 would be better off considering the special term plan from Kotak and invest separately in mutual funds through the SIP route. For others, the fixed insurance cover option is attractive, especially for investors on the wrong side of 35, even if they are non-smokers.

Investors may, however, avoid the variable insurance cover. The product is suitable for meeting objectives such as child's marriage or education. The insurance cover keeps coming down every month as you move closer to your objective. The upfront charge — an entry load of 2.25 per cent — remains unchanged. Although there are no competing insurance products on offer, the costs do appear stiff.

There may be better ways to structure insurance cover in accordance with each individual's needs. For instance, offering a combination of single payment and regular payment term assurance with the added benefit of tax rebates could prove more suitable.

Faith in DSP-ML: A more important factor that should guide your decision-making is your faith in DSP. You should believe that DSP-ML will be around for the next 21 years and that its fund management skills would be better than industry average. Given that insurance cost appears competitive, this factor alone should decide if you are going to invest or not.

The performance of DSP-ML Opportunities has been impressive since 2001. The performance of DSP-ML Equity and DSP-ML Balanced has gained ground over the last couple of years. These could be mainly because of the bull-run in stock prices. This performance may not be sustained in future, especially over a 21-year period. This, however, should not prove to be a deterring factor for investors who are comfortable with unit-linked insurance products.

In ULIPs, people repose faith in fund managers with much less information about their record. In the case of DSP-ML, there is at least the fund manager record of over five years and the backing of financial groups such as DSP and Merrill Lynch to consider.

So, it may be not entirely out of order if they invest a portion of their annual investments in the Super SIP.

For others who think relying on DSP-ML for 21 years is too much of a risk, they should consider taking one-year SIPs at a time. That way they can change their allocations to equity schemes depending on performance. Alternatively, invest only a small sum — the minimum monthly investment being Rs 2,000.

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