[ Investment Avenues - ULIPs & MFs ]

The investing community is divided over the choice of various investment avenues. There are many who prefer unit-linked insurance plans, while there are those who swear by mutual funds.

It is best to compare their returns and thus find out which one is faring better. Well, for the past one year, the numbers clearly favour ULIPs.

A ULIP is a combination of investment and insurance cover. For the investor, it is like a closed-end mutual fund. And if the investor goes for a ULIP that invests largely in equities, then the ULIP can be compared with an equity-linked savings scheme, as one invests in it for a long term because of the nature of the product and the tax benefits. So, from the investor's viewpoint, it is possible to compare it to such funds.

Closed-end MF schemes have been in vogue since Sebi's circular in April last year, directing open-end schemes to meet expenses out of entry load but permitting closed-end schemes to charge 6 per cent new fund offer expenses.

As a result, there have been over a dozen launches of closed-end schemes over the past year compared with just one fund launched between 1999 and 2005.

The closed-end funds are for a period between three and five years. However, these funds do not have a one-year track record, so a comparison with ULIPs is possible only for the ELSS, which have a longer history.

ULIPs come on top with one-year returns between 34 and 45 per cent from a sample of six schemes studied. In the same period, the average ELSS yielded 27.34 per cent returns, with the best fund generating 43.07 per cent and the worst fund 3.93 per cent returns for the year ended February 9, 2007. Let us draw some comparisons between ULIPs and closed-end funds and ELSS.

Getting systematic: While both ULIPs and ELSS have the option of systematic investment plan, it is not available in closed-end funds. In the latter, investors need to time the market, as entry at the wrong time could affect them adversely.

This is contrary to the broadly-accepted view that an SIP, in the form of smaller, regular investments, makes for a better average values and long-term returns.

Switch or withdraw: Though ULIPs do not allow withdrawal of funds for three years, they offer the flexibility to switch between schemes.

Depending on market movements, the investor can get out of equities and switch to an income (debt) scheme in a ULIP, which is not possible in a mutual fund, unless the investor withdraws from a closed-end scheme and bears the exit charges.

By switching between funds, retail equity investors can capitalise on their profits regularly in ULIPs. This is not possible in ELSS or closed-end schemes. In a ULIP, an investor can also inject a lump sum amount of up to 25 per cent of the cumulative premium already paid, which is not possible in a closed-end fund. On the other hand, any amount can be invested in an ELSS.

Charges: The charges of a ULIP are, however, higher than those of a mutual fund.

Says Jayant Pai, a chartered financial planner and vice-president of Parag Parikh Financial Advisory Services, "Insurance companies deduct around 30 per cent of the premium in the first year towards marketing expenses (including commissions payable to the agents).

Although over time, the annual charges reduce to about 3.5-4 per cent a year over the entire tenure of the policy, this back-ending of charges compels the policyholders to stay with the ULIP scheme for a much longer period (a minimum of eight-ten years), while in case of a mutual fund, it will be three-five years."

Pranav Mishra, vice-president (products), ICICI Prudential Life Insurance, says, "Wealth creation through equity investments has been proven successful over the long term through disciplined and systematic investments. Since closed-end schemes are a one-time investment plan, they do not offer this benefit to investors. ULIPs not only offer flexibility but are also transparent in nature." Of course, there is no life cover in mutual funds.

Source - Rediff

[ Investing in ULIPS - How Mr Singh Lost 24 Lacs ]

Let us find out how Mr Rajesh Singh (named changed) lost Rs 24 lakh (Rs 2.4 million) just like that and when he learnt about it, he felt completely infuriated, vexed, cheated and totally let down by his private banking relationship managers and sales personnel from the leading private life insurance provider from whom he bought this policy.

Read the full article at - http://in.rediff.com/money/2007/feb/02perfin.htm

[ Buying ULIPs? Read this first ]

Unit linked insurance plans have caught the fancy of individuals over the past few years. In fact, most individuals opting for life insurance now go in for ULIPs as opposed to term plans or endowment plans. Therefore, it becomes important for individuals to understand what to look for in a ULIP before finalising one. We outline four parameters that ULIPs need to be evaluated upon before individuals zero-in on a unit-linked product.

Investment mandate

ULIPs differ significantly from traditional endowment plans in the way they invest their monies. ULIPs have an investment mandate, which allows them to 'shift' assets freely between equities and debt. This is unlike saving-based plans like endowment plans, which invest pre-dominantly in specified debt instruments like bonds and government securities. The amount of money invested in equity has the potential to make a significant difference to the returns that the plan can generate over the long run.

Click here to understand how a ULIP's equity component makes a difference

However, ULIPs with a higher equity component can prove to be very volatile customers during stockmarket turbulence. So investors have to be sure that their risk appetite coincides with that of the ULIP. For this, make a note of the maximum equity allocation the ULIP can take on.

There are several options within a ULIP. You can select the option that best fits in with your risk profile and helps you achieve your investment objective. If you are an aggressive investor you can go for a ULIP with the maximum equity allocation - this varies from insurer to insurer but is usually in the range of 70 per cent-100 per cent of assets. If you are a conservative investor then you can opt for a ULIP option that has a smaller equity allocation of about 20 per cent.

ULIP expenses

A lot has been written about ULIP expenses in the past. At the cost of sounding repetitive, ULIP expenses do make a difference to the returns. This gets more evident over the long run. Expenses take a toll on the returns by way of reducing the amount, which gets invested. A lower
amount will yield lower returns.

ULIP expenses are broadly classified into annual expenses (excluding fund management charges - FMC) and fund management charges. The annual expenses are deducted from the premium amount and hence, that part of the premium which is net of annual expenses is invested. While annual expenses are high in the initial years, they even out in the long run
(typically 15 years and above).

Click here to understand how ULIP expenses affect returns

FMC on the other hand, is levied on the corpus till date. A higher FMC therefore means a reduction in the corpus that can generate returns going forward. FMC therefore makes a sizable difference to the returns in the long run.

Miscellaneous features

ULIPs offerings also differ across companies in terms of the flexibility offered across various parameters. For example, the minimum premium for one insurance company is Rs 10,000 while for another, it is Rs 18,000. Also, some insurance companies let individuals alter their equity: debt allocation 5 times a year at no additional cost while other companies allow alteration only twice during the year (without additional costs).

The charge on top-ups also differs- a certain insurance company invests 99 per cent of the top-up amount (1 per cent is deducted as top-up charges) while another company deducts 2.50 per cent as top-up charges, investing the remaining 97.50 per cent. Such differences need to be
considered before individuals zero-in on a ULIP product.

Focusing on your asset allocation

Individuals also need to stick to their asset allocation plan at all times. It has been noticed that ULIPs are often bought by individuals without having an understanding of the value that they bring to their financial portfolio. If their current asset allocation is skewed towards equities
(i.e. mutual funds/stocks), then what the individual may really need is a term/endowment plan. Conversely, if the portfolio is debt-heavy, then the individual can consider investing in a ULIP with a significant equity allocation.