Innovation is nothing new to the mutual fund industry. In the past, we have seen mutual funds provide add-on benefits like accident insurance, critical illness insurance and even life insurance. A recent innovation involves providing insurance benefit to the child in the event of the parents meeting with an eventuality.

While the add-on benefits may appeal to a category of investors, we recommend that investors step back a bit and evaluate the mutual fund investment first in isolation and then along with the add-on benefit, before committing monies to it.

At Personalfn, we look at innovation positively so long as it is aligned to the investor's long-term financial goals. Innovations that qualify on this parameter have been few and far between; one innovation we can think of is the systematic investment plan (SIP).

Sadly, apart from the rare innovation, most innovations end up looking like marketing gimmicks. Hence our view is that investors should be wary of these innovations and analyse them critically.

Some innovations that are not marketing gimmicks at first glance appear interesting, but a deeper analysis indicates that they are not particularly beneficial for investors. More importantly often these innovations are not in sync with the fundamental principles of financial planning.

For instance, take the bundling of life insurance with mutual funds. Prima facie, it seems like a good idea, one product giving you a dual benefit -- life insurance and savings (through the mutual fund route). However, dig deeper and you find it's not exactly how it's supposed to be.

For one, notwithstanding the investor's need for life insurance, the mutual fund may not have the requisite track record over the long-term (3-5 years in our view for equities) to inspire confidence. In a scenario like this you have a 'not-so-great' mutual fund investment offering life insurance. So what does the investor do? If he is a smart investor he will forego the life insurance add-on benefit, instead he will invest in another mutual fund with a long-term track record and take life insurance separately.

Most mutual funds that bundle life insurance offer investors an SIP facility through which this benefit can be availed. Investors have to determine the amount and tenure over which they will continue the SIP. The insurance component is limited to the extent of the unpaid SIPs at the time of the investor's demise. Of course, the investor's nominee/beneficiary will also receive the investment corpus.

Investors who are familiar with how stock markets work will appreciate the problem with such a scenario. Under the mutual fund/life insurance alliance, the individual is unable to determine exactly how much sum assured he needs, because a portion of his investment is (usually) invested in the stock markets and he has no inkling how much it will be at the time of the eventuality. And if stock markets are at lower levels (at the time of the investor's demise) and a better portion of the SIP has already been invested, then the investor's beneficiaries will be worse off and the unpaid SIPs will be a small consolation.

Investor's will note that in life insurance, a market-linked investment like a ULIP (unit-linked insurance plan) guarantees the higher of the two amounts � sum assured and the market value of the premiums. So even if the market crashes and erodes the initial investment amount, the beneficiaries are certain to receive the sum assured.

Another limitation of the mutual fund route is that there are usually restrictions in terms of the amount you can claim (effectively the sum assured) and the investment tenure (i.e. the tenure of the SIP). Most mutual funds have limits on both the claim amount and the tenure thereby making the mutual fund/life insurance alliance a little ineffective.

To be sure, even insurance companies have limits on both parameters (sum assured and tenure), but the restrictions are at considerably higher levels and most individuals would qualify at the eligible sum assured and tenure.

Compared to life insurance, mutual funds also lack another feature i.e. tax benefit. While we do not advocate that individuals opt for life insurance for the tax benefit, it is not something to be ignored either. By investing in a mutual fund with a life insurance benefit, investors will forfeit the tax benefit that they would have got if they had opted for life insurance separately.

To that end, individuals who are floored by the innovative features offered by mutual funds must evaluate both options a) investing in the mutual fund with the add-on benefit and b) investing separately in the mutual fund and the add-on benefit (for instance life insurance). Investors will likely find that the second option is more beneficial. And that is what we have observed with most of the innovations in the mutual fund industry.

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