 "Ratings to help track performance of ULIPs")
Ratings for mutual fund (MF) schemes give investors an idea of how a particular fund's historical performance has been and its performance in terms of its peer group. Until now, such data was not easily available for Unit Linked Insurance Plans (Ulips).
Morningstar, an independent investment advisor that tracks investment products, has recently started rating Ulips. While this kind of data or rating is useful for investors, there are certain factors that one must keep in mind.
According to Morningstar's website, the rating is a quantitative, five-scale star-rating system that gives a visual measure of how well a fund has delivered compared to its peers, after adjusting for risk, or volatility. The funds are rated on a scale of one to five stars (one being the lowest), based on the risk-adjusted returns. The rating includes all funds that have given returns for minimum three years. Funds that give returns for five and 10 years get different weightage. For instance, funds with 10-year history would get higher weightage.
Using this data investors can compare the net asset value (NAV) of Ulips, just like they do for MFs. The NAV data covers 98 per cent of the funds. But while in the case of an MF, the return can be calculated as easily as NAV multiplied with the number of units, it is not so simple in the case of Ulips.
With respect to returns, unlike MFs which have a fixed load / expense structure, Ulips' load / expense differ according to the plan. Typically, in insurance, one fund is offered in multiple plans and each plan has its own front load (premium allocation charge, policy administration charge, mortality charge) and these charges affect the number of units that a policyholder will get in the end. Commissions are paid out of the premium allocation charge that is deducted upfront before allotting the units. The NAV is only net of the fund management charges.
"Investors must be aware that beyond the NAV there are other charges that will affect the number of units. These charges are difficult to calculate because it varies from investor to investor and from plan to plan. For instance, the premium allocation charge will depend on the age of the investor, among other factors. We do not give data on the number of units made available to policyholders, it not possible from our end to do it. Respective companies intimate their policyholders about the number of units they hold," Chatterji says.
Despite this the rating can help highlight funds that perform well, when compared with other funds in the same category. Investors can use it as a starting point for screening out and finding out which fund meets their investment and return objectives.
"The Ulips' comparative analysis will help customers in finding historical performance of the funds. It is useful because most investors buy Ulips more for investment rather than insurance. In fact, the market risk in Ulips are borne by the investors and, hence, it is essential for them to know the performance of the schemes they have bought vis-a-vis other schemes and also how the fund managers have managed the risks," says Prakash Praharaj,founder and chief financial planner, Max Secure Financial Planners. Another drawback is that the ratings leave out certain kinds of funds, such as other bond funds or guaranteed funds. "Unlike MFs, not all insurance companies give monthly data. This makes it difficult to classify the funds," Chatterji says.
Morningstar, an independent investment advisor that tracks investment products, has recently started rating Ulips. While this kind of data or rating is useful for investors, there are certain factors that one must keep in mind.
According to Morningstar's website, the rating is a quantitative, five-scale star-rating system that gives a visual measure of how well a fund has delivered compared to its peers, after adjusting for risk, or volatility. The funds are rated on a scale of one to five stars (one being the lowest), based on the risk-adjusted returns. The rating includes all funds that have given returns for minimum three years. Funds that give returns for five and 10 years get different weightage. For instance, funds with 10-year history would get higher weightage.
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"While in case of mutual funds, good performing funds are known, in the insurance domain that knowledge is limited," says Dhruva Chatterji, senior research analyst with Morningstar India.
Using this data investors can compare the net asset value (NAV) of Ulips, just like they do for MFs. The NAV data covers 98 per cent of the funds. But while in the case of an MF, the return can be calculated as easily as NAV multiplied with the number of units, it is not so simple in the case of Ulips.
With respect to returns, unlike MFs which have a fixed load / expense structure, Ulips' load / expense differ according to the plan. Typically, in insurance, one fund is offered in multiple plans and each plan has its own front load (premium allocation charge, policy administration charge, mortality charge) and these charges affect the number of units that a policyholder will get in the end. Commissions are paid out of the premium allocation charge that is deducted upfront before allotting the units. The NAV is only net of the fund management charges.
"Investors must be aware that beyond the NAV there are other charges that will affect the number of units. These charges are difficult to calculate because it varies from investor to investor and from plan to plan. For instance, the premium allocation charge will depend on the age of the investor, among other factors. We do not give data on the number of units made available to policyholders, it not possible from our end to do it. Respective companies intimate their policyholders about the number of units they hold," Chatterji says.
Despite this the rating can help highlight funds that perform well, when compared with other funds in the same category. Investors can use it as a starting point for screening out and finding out which fund meets their investment and return objectives.
"The Ulips' comparative analysis will help customers in finding historical performance of the funds. It is useful because most investors buy Ulips more for investment rather than insurance. In fact, the market risk in Ulips are borne by the investors and, hence, it is essential for them to know the performance of the schemes they have bought vis-a-vis other schemes and also how the fund managers have managed the risks," says Prakash Praharaj,founder and chief financial planner, Max Secure Financial Planners. Another drawback is that the ratings leave out certain kinds of funds, such as other bond funds or guaranteed funds. "Unlike MFs, not all insurance companies give monthly data. This makes it difficult to classify the funds," Chatterji says.