Just like in electronic gadgets, in financial products too 2-in-1 plans can either get you the best or the worst of two things.
Unit-linked insurance plans (Ulips) are such twin schemes. They combine life insurance and mutual fund into one plan. If you understand how the twin features work, you can and should make Ulip an integral part of your investment portfolio.
Among financial experts opinion on Ulip ranges to extremes—a bluff or a boon. Irrespective of such sharp divide, investors are lapping up Ulips as a “must have” investment instrument. Over 70% of the new life insurance policies bought in the country are Ulips.
Ulips are basically “insurance plus”, the plus being the mutual fund corpus. If you can make most of this “plus” factor, which isn’t really difficult, you can also make Ulip one of the best available life insurance plans. “Ulips offer the choice to enter the stock markets indirectly, for long tenures and in a disciplined way.
They act like SIPs,” says Kolkatabased financial planner Brijesh Dalmia. What works with Ulips is the insurance cover (protection) that it offers along with the option to chose a fund type to invest the premium (less charges). It offers the combination of security and liquidity (the latter, after five years) making it flexible, relatively safe and potentially rewarding.
With stock markets unlikely to repeat the dream run of the past three years, virtues of long-term investing in stocks are being emphasised more than ever before. And this is where Ulip fits in quite well in an investor portfolio. “Anyone tracking the stock markets will sing the virtues of long-term investing. And what better way to invest for long term than through Ulips?” asks Manish Kumar, head-equity, ICICI Prudential Life Insurance.
Investing in Ulips can be rewarding, but is not always easy—not the first time at least. It comes with a higher entry barrier in the form of initial charges, a minimum lock-in period of three years and some “do-it-yourself” investing to get the best returns.
The initial high charges cover among others sales commission, marketing expenses, administrative costs, money-management fees and mortality charges. But these charges reduce dramatically after 3-5 years. And that is when Ulips as pure investment option start making better sense. In fact, unlike mutual funds who may have to take short-term sales call under redemption pressure from companies and institutional investors, Ulip fund managers have a long-term view of the market that enables them to deliver better returns.
Says Jyoti Vaswani, associate director-fund management, Aviva India: “The large inflows of Ulip money into the stock markets is good for retail investors; it brings in their participation into the stock markets and nurtures long-term wealth creation.” Even the mutual fund managers, who are generally anti-Ulip, have also begun to accept that Ulips help the markets by getting in a steady flow of money at regular intervals that checks volatility in the markets.In a rising market, equitylinked mutual funds are attractive. But if and when markets falls and investors want to exit fund schemes to book profits, they will have to pay up exit charges. Even to rebalance a portfolio across different types of funds say equity to debt or balanced and vice versa (see Should I Reallocate, page 59), there are fees to be paid by fund investors. Most Ulips allow 3-4 switches between different fund types in a year, free of cost. This makes the task of rebalancing portfolio easier and inexpensive.
MAKING MOST OF THE 2-IN-1 ADVANTAGE |
| Ulips can be best of insurance and mutual funds |
| For best returns, they should be bought for 20-25 years |
| As insurance, Ulip is a good second policy, the first being pure term policy |
| It also works as a good entry-level mutual fund |
| For best returns, use option to switch between funds |
| Initially, take at least 50% exposure to equity funds |
| Take Ulips for long term disciplined investing, not to save taxes |
Ulips are good at all stages in life, but they work best for those in 25-40 age-groups. People of these age bracket can invest for 25-15 years respectively, which is when Ulips works the best. “Long-term investing has always been fruitful; with Ulip there is an additional benefit: even at the end of the policy tenure you can remain in the fund, minus the life cover, just in case the market is low when your policy matures,” points out Dalmia. That is, if the stock prices are depressed when your Ulip policy matures, you can opt to stay invested till market revives and the value of your investment increases.
Investing in such a 2-in-1 policy does not mean you do not take insurance or invest in any other mutual fund scheme separately. Ulips shouldn’t be your first or only insurance scheme—that should always be pure term insurance policy. They work well as second insurance in your portfolio. Quite the reverse is true of their value as funds.
Ulips are good beginner’s mutual fund scheme. By allowing free change of fund type, they help pick up the basics of fund investing, which can then be used to invest big time into mutual funds. Take Ulip for protection, earning and learning.
How Sahni did it
Even the most active investors start distancing from stocks and equity mutual funds by the time they turn 60. Most also do not buy new life insurance policy at this age. But Delhi-based architect Rakesh Sahni, 60, did both.
At the age of 57 he bought a unit-linked insurance plan (Ulip) — a policy in which he will pay Rs 2 lakh a year for five years and get an insurance coverage of Rs 10 lakh for 15 years. But most importantly, with this policy, he is also making his retirement kitty lucrative.
Credit goes as much to his investment acumen as to the uniqueness of Ulip. “With Ulip, I get insurance cover and peace of mind at this age. I also manage to keep the Rs 10 lakh invested in for a 10-year period and build wealth,” says Sahni.
His interest in the policy stems from the fact that he does not want to track his investment frequently, yet he does not want to lose out completely on the returns from stocks and mutual funds.
“I have been investing in stocks and mutual funds, and now don’t have the time to track them actively,” he says. So, why insurance at this stage in life, especially when one is looking at fixed returns?
“My existing life policies are coming to maturity or expiring. There is risk of outliving my savings and hence a combination of insurance and investment.” Not what portfolio doctor would have ordered, but Sahni thinks it will work for him.
