Budget 2018 has given an advantage to ULIPs over other market linked products. What will be the impact of this change on ULIPs?
There is a positive impact of this change on ULIPs. Budget 2018 introduced the LTCG tax of 10% on equity including mutual funds on gains in excess of Rs.1 lakh; however ULIPs do not fall under LTGC tax. This means that if the customer invests in ULIPs, he or she will receive tax-free returns.
ULIPs have always been in direct comparison with mutual funds and have been perceived to be less competitive. However, the current wave of competitive and cost effective ULIPs is changing the perception of customers.
In addition, the returns/performance of ULIP funds are comparable with other market linked products. Combining all the points, i.e. competitive cost structures, tax free maturity proceed, superior performance, makes ULIPs a lucrative proposition for customers.
Still many financial advisors prefer recommending term plan for life coverage and mutual funds for investments. What is your take on this?
We are in complete agreement with the financial advisors to the extent of recommending term plans for life coverage. Term plans provide the financial risk management mechanism to customers; hence it is imperative that customers buy a term plan to cover their families against any financial contingencies in case of death or any other covered event.
However, when it comes to investment, it is important to evaluate the reason for investment and accordingly ensure a disciplined approach towards these investments to achieve respective goals. ULIPs provide this opportunity to customers in a cost effective way. Hence, for a medium to longer term horizon, the current set of ULIPs provides a competitive advantage due to these reasons:
- ULIPs give an edge to customers as they provide multiple funds in a single plan ranging from debt to pure equity. This provides an opportunity to customers to switch between funds multiple times and that too without any exit load and tax impact.
- The newer generation of ULIPs not only offer low cost structures but are also directly comparable with mutual funds that makes them more lucrative.
The premiums are tax-exempt and more importantly the maturity proceeds are tax-free (provided the sum assured is 10 x premium) which provides an added advantage.
ULIP have outperformed their benchmarks and have provided superior returns.
ULIPs also give customers an opportunity to invest in a disciplined way for their financial goals.
Therefore, even though financial advisors suggest mutual funds for investments, the customer can take an informed decision by evaluating the positives of ULIPs over mutual funds.
Tell us about the investment strategy that you follow for your ULIPs. How it is different from other insurers?
We run an extremely process driven Investment desk. Each fund has a tailor-made strategy, based on the objectives of the fund and the respective benchmark. Our approach is to beat the benchmark consistently year on year. To achieve this, every strategy used is rigorously back-tested to ensure it meets the investment objectives consistently across market cycles and regimes.
Most of your equity ULIPs have been outperforming its benchmark. What has contributed to this performance?
We look for quality companies with good management that have shown consistent growth. A company, which has the potential to become a market leader or has carved out a niche for itself in the industry. We try to assess a company’s future prospects based on a scrutiny of its financial statements. We try to project its future earnings and based on them, estimate its value. We do not mind buying them at little bit premium as quality of earnings, growth and management warrant the premium and our hypothesis is that these will continue to trade at that valuation. We have always followed this strategy and it has worked almost every time.
However, a few additional expenses in ULIPs such as fund allocation charges make it unattractive.
We always recommend purchase of ULIPs to cater to financial goals over a medium to long term basis. Yes, there are certain ULIPs in the market, which levy allocation charges, but there are also few plans that do not levy these charges. However, if purchased with an intention of holding it for a longer duration, all the charges including mortality for cost of insurance are reduced through various additions added to plans, lower FMC and superior fund performance.
The benchmark for your Equity Top 250 is Nifty 200. Buying stocks beyond the benchmark clearly increases the chances of beating the benchmark. Your comments…
In fund management industry, alpha is generated with active bets within the universe and few quality stocks outside the benchmark. For example, a fund, which has Nifty as benchmark, typically will have 20-30% of allocation to stocks outside its universe to generate alpha. We calculate risk on overall portfolio level to assess if it is worth going down the curve to generate excess returns for investors. We take appropriate calls within our risk management framework. As the saying by Peter Lynch goes, “Know what you own, and know why you own it.”
What is your outlook on equity and debt markets for FY 2018-19?
Outlook on equity markets: We continue to remain structurally positive on the equity market in the medium to long term. The economic ecosystem of India has undergone an extreme overhaul at all levels since the time it gained independence. Reforms such as Aadhaar, GST, Insolvency and Bankruptcy Code (IBC), demonetisation, bank recapitalisation, RERA can collectively transform our economy to a faster, robust and more sustainable growth path. I believe that a strong foundation has been laid and we are at an inflexion point.
Debt market: The recent H1FY19 government-borrowing calendar resulted in significant cooling in the benchmark 10YR yields. The yields rallied ~30bps in a single session. Contrary to the regular practice of front-loading its borrowing, the government decided to conduct a smaller proportion of borrowing in the first half of the year. This will facilitate greater participation by investors who have remained on the sidelines. I believe the opening of the Foreign Portfolio Investor (FPI) limits in G-Sec along with the reduced borrowing number does provide temporary reprieve for the debt markets but any material realisation to the upside risk to inflation will cause the yields to inch back up again.