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Ramalingam Kalirajan |6240 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on May 18, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Kailesh on May 10, 2024Hindi

Recently saw a policy from Max which is giving 7.33 IRR is it a good deal planning to invest 3 lacs p.a

Ans: Investing in an insurance-cum-investment scheme, like the one offered by Max with a 7.33% Internal Rate of Return (IRR), can be appealing due to the dual benefits of insurance coverage and investment returns. However, it's important to weigh the pros and cons compared to other investment options, such as mutual funds (MFs).

Evaluating the Max Policy
Guaranteed Returns: The 7.33% IRR is relatively attractive for a guaranteed return, especially in a low-interest-rate environment. It provides a predictable return over time, which can be beneficial for risk-averse investors.

Insurance Coverage: This type of policy provides life insurance coverage along with investment benefits. This can be useful if you need life insurance and prefer to combine it with an investment component.

Cost Structure: Insurance-cum-investment schemes typically have higher fees compared to MFs. These can include premium allocation charges, policy administration charges, and mortality charges. These fees can significantly reduce the net returns.

Flexibility and Liquidity: These plans often come with lock-in periods (usually 5 years for ULIPs) and less flexibility compared to MFs. Accessing funds before the lock-in period can incur penalties or surrender charges.

Comparing with Mutual Funds (MFs)
Potentially Higher Returns: Mutual funds, especially equity-oriented ones, have the potential to offer higher returns compared to guaranteed returns from insurance-cum-investment schemes. Over the long term, equity markets have historically outperformed fixed-return investments.

Lower Costs: MFs generally have lower expense ratios compared to the multiple fees associated with insurance plans. This can lead to better net returns for the investor.

Flexibility and Control: MFs offer greater flexibility with no lock-in periods (except for specific schemes like ELSS with a 3-year lock-in). Investors can switch between different funds, rebalance their portfolio, and withdraw funds more easily.

Focus on Investment Goals: If your primary goal is wealth accumulation, MFs allow you to tailor your investments to your risk appetite and financial goals. They provide a wide range of options from high-risk equity funds to low-risk debt funds.

Recommendations
Insurance Needs: If you need life insurance, consider buying a separate term insurance policy. Term insurance is more cost-effective and provides higher coverage compared to the insurance component of ULIPs or endowment plans.

Investment Goals: For growing your wealth, mutual funds might be a better choice due to their higher return potential, lower costs, and greater flexibility.

Combined Approach: If you prefer the convenience of a combined product and are satisfied with the 7.33% IRR, the Max policy could be suitable. However, ensure that you are comfortable with the lock-in period and the associated fees.

Conclusion
The Max policy with a 7.33% IRR offers a decent return for an insurance-cum-investment scheme, but it may not be the best option if your primary goal is investment growth. Evaluate your insurance needs separately and consider mutual funds for higher returns and better flexibility. Always align your investments with your financial goals and risk tolerance.

Best Regards,
K,Ramalingam, MBA, CFP,
Chief Financial Planner
www.holisticinvestment.in

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.

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