ICICI Prudential Freedom SIP: What you need to know

Last Updated on October 20, 2020 at 10:46 am

ICICI Prudential Freedom SIP also known as Freedom SIP is a combination of systematic investing (SIP) in certain source schemes (equity-oriented or hybrid) followed by a switch to a target scheme (hybrid) and systematic withdrawal (SWP) from it. Here is what you need to know about the freedom SIP and why you should avoid it.

Insurers, mutual fund houses, pension fund houses, portfolio managers, stockbrokers, bankers have only one goal in mind – transfer your money from your hands to theirs and keep it for as long as possible.

When you buy an insurance policy (apart from term plans), the money is locked in until the end of the policy period (exit can mean a big loss), In the case of deferred annuity plans, the money could remain with the insurers for life!

Much to the disappointment of AMCs, mutual funds are structured as a non-contractual investment: You can invest when you please and leave when you please (in open-ended funds). If the stock market returns are dull for a couple of months, AUM inflows drop, outflows increase and profits plummet.

So the problem before an AMC is, how do we lock in an investors money for as long as possible, preferably for life. ICICI Pru AMC came up with such a scheme and called it “freedom SIP” so that it distracts the investors from what is actually going on. Add some life insurance as an option (SIP Plus)

First, draw a bunch of arrows in the product presentation and throw in attention-grabbing words like passive income. Then add in some illustrations of happy people living their dreams. Then come the essentials.

ICICI Prudential Freedom SIP: How does it work

You invest for 8,10,12, or 15 years via SIP in one of the source schemes. At the end of that period, the amount gets switched to a target scheme and SWP initiated (amount = 1-3 times the SIP instalment). The switch and each SWP is taxable as per existing laws.

Source schemes:

• Ipru Bluechip Fund
• Ipru India Opportunities Fund
• Ipru Smallcap Fund
• Ipru Dividend Yield Equity Fund
• Ipru Multicap Fund
• Ipru Large & Midcap Fund
• Ipru Midcap Fund
• Ipru Focused Equity Fund
• Ipru Value Discovery Fund
• Ipru Balanced Advantage Fund
• Ipru Equity & Debt Fund Ipru Multi-Asset Fund
• Ipru Asset Allocator Fund (FOF)

Target Schemes

• Ipru Equity & Debt Fund
• IPru Multi-Asset Fund
• Ipru Asset Allocator Fund (FOF)
• Ipru Balanced Advantage Fund

In what can only be labelled as misrepresentation, The presentation talks about Effective SWP Return(Annual)  which is the annual SWP amount divided by the market value. This might be misconstrued as the annuity rate. This “effective return” will fluctuate with the market value of the fund and not fixed. The problem with a SIP is, since the amount is fixed, when the NAV, more units get depleted.

Fine print:

After registration, the investor cannot change any of the particulars such as the SIP tenure, the SIP Scheme (Source Scheme), the SIP Amount, the SWP Scheme (the target scheme) or the SWP Amount etc

This means if you do not like where you are investing or where you are getting money from, you cannot change!

The AMC has come up with a wonderful way to direct AUM to its favourite fund – ICICI Pru Balanced Advantage. You can register for the freedom SIP without mentioning the target scheme or even mentioning the SIP tenure! Then the default tenure of 12 years would be chosen and the target scheme automatically chosen as … guess what!

How to stop freedom SIPs? An investor simply needs to make a withdrawal in the source scheme during the SIP period to stop the further switch and SWP. Then the freedom SIP will become a normal SIP.

In summary, freedom SIP is an unnecessary idea designed only to provide long-term commissions to agents and profits to the AMC. Those who want to implement goal-based financial planning are better off with getting advice from a SEBI registered fee-only investment advisor