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If you invested in a unit-linked insurance plan (Ulip) five years earlier and are worried about the performance, take heart. A large number of these have been performing in line with the markets. Of the major categories such as large-caps and bond funds, Ulips have performed as well as their mutual fund (MF) counterparts.
Five years earlier, Ulips were offered without any restriction on their cost structures and without a cap on fees and other fund management charges. As the commissions were high, Ulips were some of the most heavily sold investment products at that time. And, there were many complaints from a large number of investors about mis-selling.
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Nevertheless, those who bought such funds and stayed for five years have no reason to complain on performance. In these five years, according to data from MorningStar India, insurance funds have returned 16.5 per cent on average annually, compared to their MF counterparts, which returned 16.4 per cent in the most common category, large-cap funds. Even as insurance funds take a conservative stance on their investing strategy, returns have been on a par with mutual funds.
Experts say Ulip invest in companies that are undervalued for the long-term. In some ways, these Ulips are passively managed and fund managers are not taking aggressive investment calls with very little portfolio churning. The weights of the major holdings are, more or less, according to the market indices. Says Sameer Hassija, senior investment analyst, Morningstar India, "Overall, it's a pretty good performance by insurance funds, as they have matched mutual funds. It seems that due to the larger lock-in periods, fund managers took longer term calls that have helped buoy their performances."
In the popular debt categories, too, Ulips have seen similar performance as their MF counterparts. Here, again, insurance funds have stuck to their mandate and not taken risks or aggressive duration calls to boost performance. In fact, insurance funds are better investors in liquid funds. In the ultra-short-term bond category, insurance funds have returned 8.3 per cent, against 7.5 per cent average returns of the MF category.
Despite the steady and in-line performance of these funds, real returns to investors in funds of over three years could be a lot lower than the performance of Ulips. The Insurance Regulatory and Development Authority (Irda) came out with a fresh set of Ulip guidelines from September 1, 2010, which lengthened the lock-in period from three to five years and restricted their fees and all other charges.
Before these regulations came in, all charges and other commissions could amount to as much as 40-50 per cent of an annual premium. In some differentiated Ulips, charges were even higher. All these are deducted from your annual investments. The insurance company reduces the number of units in your Ulips to cover the cost of mortality, distribution expenses, allocation charges and so. So, even if the performance of your Ulip has been reasonable and in line with the markets, your final returns could be considerably lower, as units from your Ulip would have been deducted to cover the costs.
Experts say an investor's net return depends on the mortality premium and the investment mix one has selected. For instance, for someone who has selected a debt portfolio and a higher life-cover charge, which increases with age, returns could be really low, though the debt-fund Ulip might have made decent returns. Says Hassija: "Ulip expenses are reduced from the units of an investor. The final returns would differ for all investors, depending on what they have opted for." However, since September 2010, Irda has fixed a cap on various charges to investors. All agents' commissions are now evenly distributed in the first five years of the lock-in period. All charges are now capped at three per cent for policies held up to 10 years and 2.25 per cent for policies over 10 years. This means if you have held a policy for 10 years and your policy's investment portfolio fetched a 15 per cent return, you should get at least 12 per cent net returns in your hands in the new Ulips.
However, buyers of Ulips before September 2010 will see a lot higher charges curtailing their returns. Says Hassija: "Net returns for investors over the last five years would be much lower than for the newer investors. Costs of Ulips were higher those days."
Most of the old Ulip funds that came before the new rules were put in place are now closed for fresh investors. Insurance companies have launched funds to comply with the new norms. Experts also say that as Ulips combine investments and insurance they have to be invested in Ulips for the long run. Says Mehrab Irani, general manager - investments, Tata Investment Corporation: "Unfortunately, most people look at Ulips in the short term. But as it combines insurance and investments, investors should look at it in the long run. Otherwise, people will jeopardise their insurance as well as their investments in Ulips." Older investors could check the returns of their funds from the relevant websites and compare these with actual returns. Run a check on your fund's performance on the insurance company's website. If your fund is underperforming the benchmark, consider switching to another within the same insurance company. Insurance funds are allowed to switch twice in a year free of cost.
New investors should look at the fund performance before signing for a Ulip plan. Also, as Ulip costs are amortised in the first five years, it's best for investors to select an asset allocation plan that is skewed towards equity.
