I have bought HDFC SL Crest insurance policy scheme and started paying premium in 2010. I have noted that there is a 40% increase in value (annual premium ₹1 lakh) as on date. I now need a monthly regular payment. Please tell me whether I can surrender the policy and and invest the amount in any MFs which will give me monthly dividend. If the strategy is okay, please also suggest some good MFs which will provide me regular monthly dividend.
- Muralidharan B
We don't believe in buying insurance-cum-investment plans for the investment needs. These plans are costly as they have a huge investment element in them. Also, you would only able to secure a modest insurance cover through them. Even the returns would be lower than pure investment products because of the insurance element in them.
If you have completed five policy years, you can surrender this policy without paying any surrender penalty. However, you will have to pay income tax on the surrender value as it will be added to your income and taxed accordingly. Also, you will have to pay taxes for tax deductions claimed earlier.
You have spoken about your need for a regular income. But you haven't mentioned whether you are looking to supplement your income or you are looking for primary income. If primary income is your criteria, you have to look for avenues like Senior Citizen Savings Scheme or Monthly Income Scheme of Post office. These avenues pay assured interest with safety of capital.
But If you are looking for supplementary income are ready to take a little bit of risk, you can look at both debt and equity mutual funds, depending on your risk profile. Monthly Income Plans invest predominantly in debt and a small part in equity. Though they are called monthly income plans, they may not offer dividend every month. But they may offer slightly better returns than schemes that offer assured returns as their returns are linked to the market.
If you are considering investing in equity schemes via systematic investment plan (SIP) for regular dividends, you have to keep in mind that the plan may run into rough weather in a falling market. The fund house may scale down the dividend or not declare one at all or it may dip into your money to declare dividend. This will erode the value of your investment in the long run. So, if you are investing in an equity scheme and supplement income, you should withdraw the money in a systematic manner from the fund, taking care to not eat into the capital.
This article was originally published on September 22, 2015.
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