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DSPML's Super Idea

The AMC's Super SIP promises to combines the best way of buying a fund—long-term SIP--with the best kind of life insurance to buy—term insurance

Fundamentally innovative product ideas don't come along every day in the mutual fund industry, but DSP Merrill Lynch's Super SIP, launching today, could be an exception. Super SIP isn't a fund but a way of buying funds that combines the best way of buying a fund--long-term SIP--with the best kind of life insurance to buy--term insurance.

Under this system, an investor will get an insurance cover from Bajaj Allianz Life Insurance Company, upon creating an S.I.P. in any of the following five funds- DSPML Equity, DSPML Top 200 Equity, DSPML Opportunities Fund, DSPML India T.I.G.E.R. and DSPML Balanced Fund.

The product offers two options- variable insurance plan and the fixed insurance plan. While the sum assured keeps reducing in the variable plan, it remains constant in the fixed plan. Under the variable plan, one can choose to create an SIP for 6, 11 or 16 years, with the amount of insurance being equal to the monthly instalment multiplied by the number of months remaining in the SSIP tenure. Therefore, in this option, the amount of sum assured keeps getting reduced by the amount of a SSIP instalment each month. For example, under an SSIP of Rs 10,000 per month for 16 years (192 months), an investor will get insurance cover of 19.2 lakh, i.e., Rs 10,000 X 192 months. In the next month, his insurance cover will reduce by Rs 10,000 to Rs 19.1 lakh (Rs 10,000 X 191 months) and so on. The insurance will be in the nature of a term insurance policy. In the event of his death anytime during the tenure of his SSIP, he will get the sum assured, over and above the investment value standing to his credit in the above-mentioned fund(s).

The tenure under the fixed option is 21 years, and the sum assured will be 240 times the monthly instalment 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 lakh, which will remain fixed throughout the tenure of SSIP.

Investors who are 18 years or above in age but less than 43 years are eligible to invest through the SSIP.

What Do You Pay For It

For investments through the SSIP, the funds will charge a higher entry load. To determine how much you would pay for the insurance cover, we have split the load on SSIP in two parts-

A load of one per cent which you would have paid to create a normal SIP in the funds of some of the other fund houses

The remaining part of the load which we consider to be the cost of insurance

See the following table for details.

Effective Cost of Insurance
Plan  Load for SSIP (per cent)  Load under a normal SIP (per cent)  Insurance cost in SSIP (per cent)*
21 year 5 1 4
16 year 2.75 1 1.75
11 year 2.5 1 1.5
6 year 2.25 1 1.25
* Figures represent percentage of the monthly instalment

One thing that distinguishes the insurance cover under SSIP from a normal term insurance policy is that here the cost of insurance for investors of all the age groups will be the same, which is not so in the latter case where a higher premium is charged from the insuree falling in the higher age bracket. 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, if we also take into consideration the savings on income tax from an insurance policy. On the other hand, people in the higher age brackets will stand to get the term cover at much lower cost. Consider the following table to understand this.

For 22-year-old              
Policy Term  Sum Assured  Policy Premium*  Tax Savings^  Net Cost of Insurance @  SIP for Rs 10 Lakh Cover #  Annual Cost of Insurance $  Benefit/ Loss**
21 year 10 Lakh 2356 707 1649 4167 2000 -351
16 year 10 Lakh 2257 677 1580 5208 1094 486
11 year 10 Lakh 2257 677 1580 7576 1364 216
6 Year 10 Lakh 2257 677 1580 13889 2083 -503
For 37-year-old              
21 year 10 Lakh 5623 1687 3936 4167 2000 1936
16 year 10 Lakh 4653 1396 3257 5208 1094 2163
11 year 10 Lakh 3851 1155 2696 7576 1364 1332
6 Year 10 Lakh 3524 1057 2467 13889 2083 383
*Annual premium for Anmol Jeevan-1 of LIC
^ Assuming an investor in the 30 per cent tax bracket
@ Net cost = Policy Premium - Tax Savings
# Monthly instalment under the SSIP required to get a Rs 10 lakh cover
$ Cost of insurance in case of SSIP by way of additional load paid. Also see Table 1

In the above table, Net Cost of Insurance represents the annual premium (net of tax) which one would have paid for the term insurance policy Anmol Jeevan-1. Annual Cost of Insurance can be considered as the cost which one incurs if he opts for the SSIP with the same amount of sum assured for the same tenure (calculated as per the cost of insurance determined in the Table: Effective Cost of Insurance).

One can see that an investor of 22 years of age incurs more cost for the insurance in the 6 and 21 years plans. However, a 37 years old investor gets the insurance cover with the SSIP much cheaper as compared to a term cover taken otherwise.

Among the drawbacks of the plan, firstly it might prove a little expensive for young investors, as explained above. However, we think that the difference should not be glaring enough to act as a deterrent. Secondly, an investor gets a limited choice of five DSPML funds, which have been middle of the road performers over the years. Another thing to note is that by creating an SSIP, an investor would be making a monthly investment commitment for a number of years going ahead. Therefore, one has to be sure beforehand that he would be able to invest the fixed amount each month throughout the tenure of the SSIP.

However, we think that the product has a lot to offer on the positive side. It promotes some of the best investment practices that every investor should follow. It induces the habit of investing regularly over a long term to accumulate sizeable amount of capital. Moreover, it provides the investor with a term cover, which we believe, is the best form of insurance, and that too, at a low cost. The product also provides an investor with the option of liquidating his investments without the loss of the insurance cover.

The Final Word

The product has the potential to pose a big challenge to the unit linked insurance plans, a product sold aggressively by insurance companies, which also tries to combines the attributes of investment with insurance. In a nutshell, the product integrates the basics of an ideal financial plan in the most simple and investor-friendly manner.