Out of the blue, Indian Insurance Industry has become the talk of Dalal Street as it has become a major contributor in terms of investments in equity market. Though the premium collection has slowed down in early 2009 to some extent but it has been gaining pace with overall healthy market sentiments. The premiums collected under ULIPs are the major driver in boosting the equity investments. The renewal premium of the industry in ULIP category increased from Rs. 26,638 crore to Rs. 37,543 crore, an increase of 41 per cent on year on year basis. In addition, insurance companies have increased their exposure in equities – they have invested Rs. 44,358 crore in equity in the April-December period of current fiscal year.
The mis-selling practice in ULIPs are curbed to a major extent after the insurance watchdog, Insurance Regulatory and Development Authority (IRDA) introduced some ‘ investors’ friendly ruling, putting the cap on charges up to 3 per cent and 2.25 per cent for ULIPs having maturities up to 10 years and beyond 10 years respectively. Moreover, the IRDA ruling on solvency ratio, corporate governance, public disclosures, payment made to intermediaries and allowing unit linked health insurance plans, have benefitted greatly to Insurance industry.
How do ULIPs perform well in long-term?
The major objective of ULIPs is to build wealth, steadily in long-term along with an additional insurance cover. Investors should have a clear view that, investing in ULIPs is not to get a high insurance cover out of it.
The Fund Manager in Insurance firms has an edge over other market related products, in terms of holding stocks for an extended period. Hence, the churning in portfolio stocks, measured by Portfolio Turnover Ratio (PTR) is relatively less or negligible. Since the churning involves costs, it has a major impact on fund’s performance. Higher the Portfolio Turnover Ratio, higher is the cost involved.
Moreover, IRDA’s cap on total charges including cap on Fund Management Charges (FMC) in case of ULIPs have brought another transparency benefiting policyholders in terms of increased returns at their ends.
A close look on the performance of other market related products vis-à-vis ULIPs gives a startling fact; other market related products lags behind ULIPs return by a larger margin in the long run which confirms that investments in ULIPs are ideal investment vehicle for wealth creation in long term. On an average, the historical fund management charges (FMC) in other market related products (Mutual Funds come to be around 2.1 per cent) while in ULIPs, the maximum FMC is capped at 1.35 per cent.
For example, a periodic investment of Rs. 1 lakh in a diversified equity linked fund (ELSS) for a period of 15 years grows to Rs. 28.54 lakh at an assumed growth rate of 10 per cent giving an net yield of 7.69 per cent (considering an average FMC of 2.1 per cent) while the same amount invested in ULIP for the same period may range from Rs.28.63 lakhs to Rs. 31.59 lakh at an assumed growth rate of 10 per cent giving a net yield ranging from 7.97 per cent to 9.03 per cent. The final value goes down further if we consider other tax-saving instruments such as PPF giving a return of 8 per cent annum. An investment of Rs.1 lakh per annum in PPF for a period of 15 years grows to Rs.27.15 lakh.
So, clearly, ULIPs score over other products in terms of returns and additional benefit such as insurance cover; however, it scores below PPF as investment in ULIPs involves high risks. The return in ULIPs goes up further due to less FMC if the investment choice is debt fund and assumed rate of return is 10 per cent (in debt funds, the FMC is generally around 0.75-1 per cent). The table shows the different returns as given above. However, the high entry costs along with operational costs mar performance of ULIPs having or when opted for shorter maturity period.