Is the Super SIP a great investment?

Now, we have something more than just a Systematic Investment Plan -- we have a Super SIP.

Launched by DSP Merrill Lynch, Super SIP isn't a fund but a way of buying funds that combines a long-term SIP with term insurance.

How does it work?

An investor will have to decide to invest in any of the five mutual funds belonging to the fund house DSP Merrill Lynch.

1. DSPML Equity
2. DSPML Opportunities Fund
3. DSPML India T I G E R
4. DSPML Balanced Fund
5. DSPML Top 200 Equity

It should not be a one-time investment but an SIP, which means the investor must commit to investing a fixed amount every month. When the Net Asset Value rises, he will get less units for his money. When the NAV drops, he will get more units.

Once he opts for an SIP in any one of the above funds, he will get an insurance cover from Bajaj Allianz Life Insurance Company.

How does term insurance work?

It is the most basic form of life insurance.

Here, the entire premium you pay goes towards covering the risk of death over a certain number of years.

Say you insure yourself for 30 years. If you are around after the term is over (30 years, in your case), you will forfeit the premiums paid.

But if something unfortunate were to happen to you while the insurance cover is in force, your beneficiary will get the amount you were insured for.

Scenario One: You pay the premiums; you get nothing; your beneficiary gets nothing.

Scenario Two: You pay the premiums; you get nothing; your beneficiary does.

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What the Super SIP offers

The Super SIP offers two options -- variable insurance plan and fixed insurance plan.

Variable insurance plan

The sum assured (amount you are insured for) keeps reducing in the variable plan.

Under the variable plan, one can choose to create an SIP for six, 11 or 16 years. The amount of insurance will be equal to the monthly installment multiplied by the number of months remaining in the SSIP tenure.

Let's say you have an SSIP of Rs 10,000 per month.

You have opted for a 16 year (192 months) tenure.

Your insurance cover = Rs 19,20,000 (Rs 10,000 X 192 months)

In the next month, your insurance cover will reduce by Rs 10,000 to Rs 19,10,000 (Rs 10,000 X 191 months) and so on.

Therefore, in this option, the amount your beneficiary gets if you pass away (the sum assured) keeps getting reduced by the amount you pay as the SSIP installment each month.

In the event of the investor's death anytime during the tenure of his SSIP, his beneficiary will get the current sum assured, over and above his investment in the fund.

Fixed plan

Under this plan, the insurance stays constant.

So does the tenure. Unlike the variable insurance plan, you don't have the option of investing for six, 11 or 16 years. Here, it is a flat 21 years.

The sum assured will be 240 times the monthly installment amount. For example, under an SSIP of Rs 10,000 per month in the fixed option, an investor will get an insurance cover of Rs 24,00,000, which will remain fixed throughout the tenure of SSIP.

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Why the SSIP is good

1. It induces the habit of investing regularly over a long term to accumulate sizeable amount of money.

2. It provides the investor with a term cover, which we believe is the best form of insurance; besides, it comes at a low cost.

3. Even if you sell your units mid-way, the insurance cover does not decrease. So lets say you opted for a 16-year tenure. You can sell your units anytime during this period, you don't have to wait for 16 years to be completed to sell. This does not affect your insurance cover because you already paid the premium in your entry load (read below).

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Why the SSIP may not be good

1. The entry load is high

A higher entry load. This is the fee you pay when you buy the units of a fund. It is a percentage of the total amount you invest in the fund.

Let's say a mutual fund has an entry load of 2%. This means if you invest Rs 25,000, you will have to pay a fee of Rs 500; as a result, the amount you actually invest is Rs 24,500.

Normally, the load for an SIP is 1% on your investment every month. Over here, it is much higher.

Tenure	SSIP load	SIP load	Insurance cost in SSIP
21 years	5%	1%	4%
16 years	2.75%	1%	1.75%
11 years	2.5%	1%	1.5%
6 years	2.25%	1%	1.25%

The figures represent the percentage of the monthly installment charged as entry load.You would have paid an entry load of 1% to create a normal SIP in many of the other mutual funds which charge an entry fee (some funds, however, charge an exit fee). The remaining part of the entry load charged by the SSIP is the cost of the insurance .

2. Young investors suffer

In a normal term insurance policy, the cost of insurance increases with age. The older you get, the higher the premium you pay. This is not true in this case. The premium is the same, whatever be the age group.

What this means is that young investors may end up paying more for insurance under the SSIP, as compared to a term cover taken otherwise.

Moreover, in the latter case, they will also get the tax benefit on the insurance premium.

Young investors may find it makes more financial sense if they take a separate term insurance policy and invest it in any fund you choose with a lower entry load.

Let's see how investing in the SSIP works out for investors of different age groups in the 30% tax bracket.

SIP = Rs 4,167

Sum assured = Rs 10 lakh (Rs 1 million)

Tenure of investment = 21 years

	Policy premium*	Tax saving	Net cost*	Annual cost*	Benefit / Loss
22-year-old	2356	707	1649	4167	- 351
37-year-old	5623	1687	3936	4167	1936

Policy premium = annual premium for LIC's Anmol Jeevan 1

Net cost = Policy Premium - Tax Savings

Annual cost = Cost of insurance in the SSIP

Benefit / loss = Negative figures represent the excess you pay for insurance in the SSIP vis-à-vis Anmol Jeevan-1, and vice versa.

3. Limited options

Since the tenure is long, you must think carefully about whether or not you wants to invest in the SSIP. The options are limited to just five funds.

If you are not pleased with their performance or have already invested elsewhere in similar funds, it may not make sense doing so just for the insurance cover.

If you are young, it is better to check out other mutual funds and take a separate insurance policy unless, of course, you do want to invest in DSP Merrill Lynch's funds.

 

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