You may have many questions about New Fund Offers (NFOs). Why do insurance companies bring NFOs? Should one invest in the NFO of an insurance company?
It’s natural to have questions. Before making any kind of investment, you should know where your money is going and how much return it will yield. So let’s find out what are these NFOs of insurance companies?
Insurance companies bring NFOs to expand their business. These NFOs are based on a particular fund or sector. In fact, on investing in this scheme, investors are buying the ULIP of the insurance company. They also get life insurance cover along with the investment. The amount of insurance cover is determined at the time of investment. After deducting the amount of insurance cover, the remaining amount is invested in the scheme. ULIPs are long-term plans like 10 or 15 years. money can only be withdrawn after a lock-in of 5 years.
Like mutual funds, the initial value of a unit of an NFO of an insurance company is 10 rupees. This is called Net Asset Value or NAV. Companies ask investors to invest in ULIP linked with the NFOs as the NFO will be available at cheaper rate of 10 rupees per unit but remember that after listing of the NFO, NAV will fluctuate according to the market. The new ULIP will seem cheaper than the existing ones because it is available at 10 rupees.
The purpose of insurance companies bringing NFOs is to provide better returns by investing in high-growth sectors. For the past nearly one and a half years, insurance companies have been raising money through ULIPs’ NFOs. For example, ICICI Prudential’s Signature Ulip has a Midcap Hybrid Growth Fund. Bajaj Allianz Life had brought Flexi Cap Fund with Smart Wealth Goal ULIP. Tata AIA has brought three NFOs. These were Emerging Opportunity Fund, Small Cap Discovery Fund and Dynamic Advantage Fund. Recently, Max Life had launched Nifty Smallcap Quality Index Fund.
When you buy an ULIP, you are actually investing along with buying an insurance policy. But, you will pay for both. You will pay Mortality Charges for insurance cover. Companies recover this from you for providing life cover, which increases with age. In addition to this, you will pay fund management charges for investing in the fund, which includes expense ratio also. Not only that, there are two more types of fees you are required to pay. First policy administration charge and second premium allocation charge.
Under Section 80C of the Income-Tax Act, tax exemption is available on annual investment up to 1.5 lakh rupees in ULIPs. However, this benefit will only be available if the investment amount is up to 10% of insurance cover. If the premium is more than this, no tax benefit will be available. For example, if you have invested 1 lakh rupees in an NFO of insurance company, then the insurance cover should be at least 10 lakh rupees. The maturity amount will be tax-free only if the annual investment in ULIP is up to 2.5 lakh rupees.
Let’s understand what is the difference between the NFO of an insurance company and a mutual fund company. Personal finance expert Jitendra Solanki says that in the NFO of insurance companies, there is benefit of life cover. Investors also get tax benefit along with return. But, only return is available in the NFO of mutual funds. On this front, NFOs linked to ULIPs seem better. The benefit of life cover is not available for free. The company charges for it.
So, your entire money is not invested. Investment and insurance get mixed up which is not considered good in any way. Term insurance is much better. After buying sufficient insurance cover, remaining money can be invested in mutual funds.
If you are also thinking of investing in the NFO of insurance companies. Then, you should only invest if you are ready to be tied up with ULIP for 10 or 15 years. All in all, NFO is a gimmick to sell ULIPs. You should always invest according to your needs, not just because the unit price is 10 rupees of the NFO.
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