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Commission Oriented Advise

A Jagoinvestor Forum user asked this question:

One agent suggested to invest lumpsum into Reliance MIP (say abour 3 lacs) and choose the growth option.  After one year, go for a SWP from the scheme ( of about 3000 rs) investing the same as SIP in an equity fund to get a balanced mix of debt/equity.  Your comments on this is most welcome

I answered, but I think the answer needs elaboration:

(SWP=Systematic Withdrawal Plan, SIP: Systematic Investment Plan. You either put in or take out the same amount of money every month, automatically)

If you do this, you will pay commissions twice – once while getting into the MIP (REL MIP btw, currently is giving 1-1.5% upfront commissions) and then again when getting into the equity fund (again, 0.5% to 1%). You don’t see these commissions in your fund NAV but it is something that is being paid through the management charges, so you pay them indirectly.

The agent wants you to do this so it gives him:

  • Upfront commissions on the 3 lakhs (of say 1%, Rs. 3,000)
  • Trailing commissions of about 0.5% on the MIP for a year (0.5% or Rs. 1,500)
  • After a year, say you withdraw and invest Rs. 25,000 per month. He makes 1% on each equity entry as commissions (Total in 2nd Year: Rs. 3,000) and an additional Rs. 1,500 as trailing commissions (same for equity or MIP).

Effectively you pay 1.5% as commissions in both years. Had you SIPed only into the equity fund, you would pay 1.5% in year one, and 0.5% from year 2 onwards.

Awesome Commission Deal

Never transfer (STP) from MIP plans to Equity plans. Why? The MIP already has about 20% equity exposure! Why would you transfer from a part-equity plan to a full-equity plan? It is much better to STP from a Liquid fund or a floater fund into an equity plan.

Also note – why is he asking you to do this after 1 year? Reliance MIP has an exit load of 1% if you leave earlier. If you want to do something like this consider buying a Reliance Short Term plan (no exit load) and transferring slowly into an equity fund starting now (why wait a year). This is something your distributor will not like, since commissions are lower, but it’s far better for you. 

I wouldn’t advice throwing in a lumpsum into the equity markets – if you have a ton of cash you need to invest, just buy a short term fund and let the money flow into equity regularly.

(Note: This is still lesser than what you would pay for an insurance plan.)

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