Why investing in ULIPs makes sense

Unit-linked insurance plans (ULIPs) have caught the fancy of investors in urban centres. These not only provided life cover, but also brought in a lot of transparency in the way the policyholders' money is invested.

Birla Sun Life Insurance Company revolutionalised the life insurance industry in India with its decision to offer only ULIPs. The rest of the life insurers followed, including the public sector Life Insurance Corporation (LIC).

The key stock market indices are touching newer and newer peaks and its time to take a look at how ULIP equity funds have performed in 2005.

The returns from growth funds of leading private sector players, ICICI Prudential Life and Bajaj Allianz, are comparable with the gains in the NSE Nifty index since January 2005.

But the performance of the growth funds of the two life insurers lags that of the diversified equity funds of major mutual funds, which have delivered returns in the range of 35 per cent to 45 per cent since the beginning of the year.

ICICI Prudential Life's Lifelink Maximiser (Growth Plan) provided a return of 32.97 per cent since January at the current NAV of Rs 33.47. While the NAV of Bajaj Allianz' Unitgain Equity fund rose 32 per cent since January 2005 to Rs 13.56 now.

SBI Life Insurance's Horizon Equity Fund stands out among life insurers as well as mutual funds. The absolute return provided by the fund is a whopping 77.6 per cent since January 2005. 

Returns from ULIP Growth Funds in 2005
FUND	NAV as on 3-Jan	NAV as on 13-Dec	Return  (%)
Birla Individual Life Enhancer	17.89	20.24	13.15
ICICI Lifeline Maximiser	25.17	33.47	32.97
Bajaj Allianz Unitgain Equity	10.27	13.56	32.00
LIC Future Plus Growth Fund	N/A	11.78	*24.13
Horizon Equity Fund	#10.00	17.76	77.6
*Annualised return, #as on January 11, NAV in Rs

The equity fund of Birla Sun Life, which pioneered ULIPs in the country, has not kept pace with the performance of its peers in 2005. Birla Sun's Individual Life Enhancer fund has provided a return of only 13.15 per cent since January with its current NAV at Rs 20.24. The public sector LIC's Future Plus Growth Fund has provided an annualised return of 24.13 per cent with its NAV at Rs 11.78.

The returns on ULIPs should normally be higher than the mutual funds. ULIPs do not face redemption pressures as the insurance money is for longer term and hence provides room for fund managers to design better, discplined investment strategies.

In contrast, fund managers at mutual funds are constantly under pressure from redemptions and the expectations of an extra 1 per cent return, particularly in equity funds.