Why insurance is not an investment

He sold 2,000 units a few months ago when the Net Asset Value was 129.

Now, with the NAV at 193, he is thinking of selling 1,000 units and holding onto the balance 1,000.

Is that a wise decision? Should we sell all or hold on to all?

- Mandar Dandekar

You have earned whopping returns of close to 34% per annum over the last 10 years of the existence of Reliance Growth Fund!

Your example highlights the fact that investing in equities is a long-term game and one has to be patient enough to earn meaningful gains.

If you need the money, this is perhaps the best time to sell your units and put the money to whatever use you want to.

If you do not need the money, you can hold on.

You can leave the money invested for a few more years and let it grow the way it has over the last 10 years.

The stock market is bound to witness turbulence over the short-term. But, from here on, things are still bright from a long-term perspective.

So, if you are not in the need of money right now, don't sell.

• The right way to invest your money

I am 24 and fall in the income bracket of Rs 2,50,000 to Rs 2,75,000.

My annual life insurance premiums on my three policies amount to Rs 46,084.

I invest Rs 1,000 every month in a mutual fund (UTI Dynamic Equity) via a Systematic Investment Plan. I am thinking of no longer investing in this fund. What do you think?

- Rohan Kadam

You have committed the common error of treating life insurance as an investment.

We always recommend that one should keep his investment and insurance needs separate.

Ideally, one should go for term insurance of an appropriate amount.

It is the best and the cheapest form of insurance. Here, you are insured for a fixed amount for which you pay a premium. Should you die, then the person you nominate will get the money. 

Since term insurance is the cheapest form of insurance, you can get a reasonably high insurance cover at a fairly low premium as compared to the other insurance products.

The remaining amount should be allocated to various investment instruments like mutual funds, National Savings Certificate and the Public Provident Fund. This all depends on how long you want to block your money and how much of a risk you are willing to take.

In your case, it seems you have put a chunk of your savings in insurance policies only. This is not a wise investment.

We would advise you to review your portfolio.

Start by deciding how much insurance cover you need.

Say you decide that a life cover of maybe Rs 10 lakh (Rs 1 million) or 15 lakh (Rs 1.5 million) is good enough. Buy a term insurance of that amount.

At your age, the annual premium should be quite low, about Rs 2,500 to Rs 3,000 per 10 lakh of sum assured per annum.

Allocate the remaining part of your savings among various investment instruments as per your needs. 

Regarding the UTI Dynamic Equity Fund, it is a fund that invests primarily in equities. Depending on how the stock market looks, it can also divert its entire portfolio towards debt (fixed return) and money market instruments.

So, if the fund manager foresees a turbulent time or a slump for the stock market, he has the option to sell the shares the fund has invested in and put the money in these investments.

Since its launch in September 2003, the fund has shown a tendency to keep a sizeable part of its total investments in cash and highly liquid investments (35% as per the December 2005 portfolio).

The fund also invests heavily into mid- and small-cap stocks.

On the performance front, it has done quite well till now. With two-year returns of 44.67%, it has beaten the average returns of diversified equity funds of the same period by a good margin. If you are not concerned about the fund's inclination towards mid-cap stocks, then you can stay invested in it.

If you have decided to switch to another fund, then look at our five- and four-star rated funds. These ratings (one to five stars) are given according to the returns given by the fund and the risk they have taken to give the returns. You will find them on our Web site.