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Insurance ‘The newer generation of ULIPs are directly comparable with MFs’

‘The newer generation of ULIPs are directly comparable with MFs’

In an email interview Bismillah Chowdhary, Chief Investment Officer, Edelweiss Tokio Life Insurance shares his views on ULIPs as a long-term investment solution and his investment philosophy.
Padmaja Choudhury Apr 10, 2018

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.

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D B DESAI · 6 months ago
Provide open architecture in Life & General Insurance and see the difference. I am sure you will be surprised to see that financial advisors are finding it comfortable to recommend ULIPs. In addition to open architecture some steps like rationalisation of commission structure, relaxation of penalties on surrender would also prove immensely beneficial for the industry in the long term. The industry problem of attrition rate would also be negated as business flow would increase even with the smaller number of distributors having long term business plans and commitments towards quality in sales.
VEERENDRA KUMAR A D · 6 months ago
How can two products with different mandates be compared can ULIP investments be stoped after One or two years if the performance is not good.Do clients get daily update of the fund value in ULIP, is there trancperency on the cost of ULIP are ULIP retuerns calculated on Gross investemt made or Net investments.
Jagdish Vaghela · 6 months ago
Dear Mr. Virendrakumar,
ULIPs are transparent in nature. As per IRDA guideline Benefit illustration of ULIP offers transparency to check impact of charges on overall return. Company also offers Gross return and calculated net yield to analyse impact of charges.
As far as NAV is concern you can check ULIP NAV on moneycontrol everyday...and also it is published on company website...besides customer can also use online portal to track their ULIP fund performance.
And yes ULIP can be stopped even after first premium subject to discontinuation charge....which is also upfront mentioned and can be checked in benefit illustration. Thus if you do not like the fund performance you can change to different ULIP fund.
switching is another good option ULIP offers...which allows you to balance your allocation between equity and debt. hope you find this useful.
DOLFIN davis · 4 months ago
My understanding of ULIP policies.
1.ulip not give proper coverage required for clients. Due to mix with investment, if client could not continue with investment , insurance coverage also loose. But in online term plan client can reduce insurance expenses upto 30%(than with agent) and continue insurance even 70+ years with very low premium. Please check policy bazzar.com. Balance amount plan to invest in ULIP may divert to mutual funds and earn comparatively higher return than ULIP even after 10% LTCGT. And investment period is flexible
2. If client discontinue with Ulip within 5 years ,80c tax claim will reverse.
3. If insured person dies in the policy term, nominee may receive only either of fund value or sum assured value whichever is higher. In my understanding this is the major disadvantage of ULIP policies. If client take a term policy and dies in policy term his nominee will receive sum assured (in ULIP sum assured may less due to heavy investment part) and his investment in mutual fund also receive by nominee.
4. Transparency of expenses in ULIP doubts me. If anyone can show statement of monthly expense of any Ulip fund of last 5 years may appreciable and can compare with MF.
Interaction may helpful to both clients & advisors
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