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Suresh Krishnamurthy

In insurance schemes, the impact of administrative charges wipes out the benefits of their tax-efficiency. As such, insurance schemes are not attractive options for channelling your investments into equities.

NEWSPAPERS have been splashed with advertisements of how the funds of LifeTime, ICICI Prudential's Life Insurance scheme, performed between August 2002 and August 2003.

While the advertisement makes for interesting reading, insurance schemes are still short of being suitable investment vehicles for investors desiring exposure to the equity market. For those wanting exposure to the debt market alone, insurance schemes score over their mutual fund counterparts.

However, those seeking exposure to equity would be better off investing their surplus in mutual funds and relying on insurance schemes only for term assurance.

One-time show: The three funds of LifeTime are Protector, Balancer and Maximiser. Protector is a debt fund, Balancer a balanced fund and Maximiser, an equity fund. Prima facie, the performance of these three funds appears reasonable. However, they fare poorly when compared to mutual fund schemes.

For example, Balancer and Maximiser did not do as well as Prudential ICICI Balanced and Prudential ICICI Power respectively. Protector, though, fared well against the mutual fund scheme, Prudential ICICI Income Plan.

Importantly, many schemes from the stable of other mutual funds have outperformed Prudential ICICI's schemes. In other words, the LifeTime funds have not done as spectacularly as mutual funds.

In addition, even if the performance can be considered modest it is only for a brief period of 12 months. This is insufficient to consider longer-term investment such as an insurance scheme.

Besides, mutual funds are still more attractive options compared to insurance schemes. Mutual funds are more transparent, as their portfolios are disclosed in regular intervals.

Select mutual fund schemes also have performance records spanning more than five years. It is easier to identify a mutual fund scheme that fits in with an investor's objective than choosing an insurance scheme.

Advantage squandered: Insurance schemes have an advantage. They are more tax-efficient than a mutual fund scheme. Profits from mutual funds suffer a tax of about 10 per cent. In contrast, receipts from insurance schemes are tax-free. However, insurance companies charge administrative charges.

Administrative charges are similar to entry loads for mutual funds. They work out to an average of about 5 per cent whereas it is nil for debt mutual funds and do not exceed 2 per cent for equity and balanced funds. This difference in `entry loads' wipes out much of the beneficial impact in the form of tax efficiency.

If insurance schemes and mutual fund schemes generate similar returns, the post-tax returns to an investor would be similar under both options. In other words, insurance companies have squandered the tax benefit that they possess by charging large administrative charges.

Score over debt schemes: Given the impact of administrative charges and their lack of performance record in equity investing, investors would be better off choosing mutual funds for their equity investments. There is the risk that they would underperform equity mutual funds.

However, for debt investments investors can opt for insurance schemes as, in the debt investments, insurance schemes are unlikely to underperform mutual fund schemes.

Besides, with their longer-term investment horizon, insurance schemes may even garner better returns than a mutual fund scheme. Open-end mutual fund schemes cannot invest in extremely longer-term securities because of liquidity constraints.

However, before choosing insurance schemes for their debt investments investors need to check out two points. They need to hunt for schemes that suffer the lowest average administrative charges.

For example, if the average administrative charges were less than 5 per cent, the after-tax returns would even be superior to mutual fund schemes.

Investors also need to ensure that they are not saddled with excessive term assurance. For every rupee invested in insurance schemes, a proportion will be deducted for term assurance.

If investors already have sufficient term assurance, the mortality charge for term assurance deducted from the annual investment will reduce the returns. If these two factors are taken care of, insurance schemes should score over mutual fund debt schemes.

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