If one goes purely by the content from a search engine’s results, one would carry the notion that Unit Linked Insurance Plans (ULIPs) offered by insurance companies are costlier and lack the same transparency as mutual funds, besides generating much lower returns after 5 years, which is the lowest installment premium paying term for a ULIP investor.
Now, if one shifted the needle from 5 to 10 or 12 years, much of the above criticism stands weakened.
To understand a financial product one must determine its optimal holding period first, and then compare costs. At the end of a 10 to 12 year period, the cost of a ULIP which may seem costlier at the end of a 5-year period due to front loading of costs as against mutual funds that charge evenly throughout the holding tenure, will appear to be similar.
In certain cases, it may even seem less expensive since ULIP costs start dipping during the second half of a dozen-year tenure. The myth around cost and transparency is thus no longer an entirely fair one. As for returns, take a good look at the numbers and decide whether a ULIP’s net returns are better at the end of a 10 to 12 year term compared to that of a dynamic asset allocation mutual fund.
So, does this mean ULIPs are superior to mutual funds as an investment vehicle?
The simple answer is yes and no. It depends on whether one prefers apples or oranges, as that is the nature of the comparative studies that one reads on many financial websites. The simpler way to look at it is to pick the investment mode based on the appropriateness of a product to the temperament of an investor.
Allow me to cite an example to buttress my point.
A successful businessman and Ultra HNI investor, who is my client now, told me how, just before the stock market rallied in 2013, he got fed up of waiting for good returns from the mutual funds he invested in after just 15 months and sold all of them. With the not so inconsiderable proceeds, he purchased an exotic painting on the advice of his then ‘wealth manager’ from an MNC private bank. He was assured that the artist was the next MF Hussain and that in 25 years he would earn an obscene return from this investment.
Now that is something only time will tell, but my hunch is that 7 years down the line, there has been no significant appreciation in either the value of the painting or the standing of the artist. Worse still, his wife, a far more astute investor, hated the painting and he now pays handsome locker rent to his bank for hosting the ‘masterpiece’. So, would he have been better off, if notwithstanding his impulsive temperament, he held a less liquid ULIP investment in 2013 ? More on this topic, in the next column.
Financial advice
Ashok Kumar heads LKW-INDIA. He can be reached at ceolotus@hotmail.com