SBI Life Insurance has recently launched a new single premium Unit Linked Insurance Plan - SBI Smart Wealth. The plan offers investors the choice between a Return Guarantee Fund (RGF), Equity Fund, P/E Managed Fund or Bond Fund. Here's a run down of the pros and cons of the plan. The Return Guarantee Fund promises investors a minimum maturity NAV of Rs.20 per unit . If the fund manages to deliver a better NAV at maturity, investors can avail of that.

How does it work?

The minimum and maximum ages for investing in the plan are 8 and 65. The minimum single premium payable is Rs 50,000.The sum assured is 1.25 times of the premium for age up to 45 and above that it will be reduced to 1.1 times. The premium collected from the policyholder is invested after deducting the premium allocation charge in any of the four funds chosen. RGF will be open for subscription for a maximum period of three months and has a fixed termination date 10 years from the start of subscription.

The customers also have added protection of a Accidental Death Benefit Option.On survival of the policyholder up to maturity, the fund value will be paid in a lump sum. Investors also get a Settlement option where the maturity proceeds can be availed in instalments within five years from the date of maturity. During this period the fund will be invested in the existing funds and the risk on investment will be borne by the policyholder.

Death benefit: Higher of the fund value or sum assured is payable, with a minimum of 105 per cent of the single premium paid. The sum assured will be reduced to the extent of partial withdrawals made in the last 24 months.

Where they will invest: For the RGF and Bond Fund, a minimum of 60 per cent of the premium will be invested in debt instruments and a maximum of 40 per cent will be invested in money market instruments. Under the Equity Fund 80 per cent of the premium will be invested in equity and rest will be invested in debt/money market instruments. In the P/E Managed Fund, the fund's allocation to equity and debt will shift based on the market's price-earnings multiple or PE. It will have higher exposure to equity when market PE is low and cut back the exposure when the P/E multiple is higher.

Charges: For the pure debt oriented schemes, insurer will charge one per cent of the fund value and it will be higher by 0.35 per cent for equity options. Premium allocation charge will be three per cent of the premium. A monthly policy administration charge of Rs 45 will be deducted for the first five policy years by cancelling units. For the guarantee provided under the RGF Fund, there will be a guarantee charge of 0.35 per cent of the fund value per annum.

Pros and Cons : Individuals should choose from SBI Smart Wealth's basket of options based on their risk appetite. If you are very conservative you can consider the RGF fund option.

If the fund's maturity NAV does turn out to be Rs.20, you will get an effective return of seven per cent from the fund. After accounting for tax savings, if you are at 20 per cent tax bracket your effective yield may work out to 9 per cent.

The fund's investment strategy on the RGF is likely to be “buy and hold”. As it is a bond fund, the yield at maturity may be easy to predict.

Those buying RGF should ensure that they are not opting for partial withdrawal, if the option is exercised they may lose the guarantee.

Those interested in taking more interest rate risk for a higher return within the bond category, can consider Bond Fund.

Within the equity options, the P/E Managed Fund appears a good bet as you get to invest more when markets are low and can cut back the exposure when markets are high, without having to track your portfolio very closely.

The fund may however offer lower returns (with lower risks) than the pure Equity Fund option. Since the Smart Wealth is a single premium product, the net yield is likely to be higher when compared to regular premium paying policies.

Related Topics
comment COMMENT NOW