A recent study has showed that there is a 40% increase in younger Indian investors, who seek to invest based on a clear-cut financial plan post the advent of Covid-19, as opposed to earlier when it was sporadic and largely unplanned.
Interestingly, a recent survey by a Life Insurance company indicated that two out of every three i.e. 66.66% of the respondents have said they will invest in Unit Linked Insurance Plans (ULIPs) in the coming year.
The key reasons attributed for ULIPs popularity amongst affluent investors, according to the report was its ease of tracking, relatively low-cost structure over time and the convenience of adding a rider or top-up. The survey also indicated that ULIPs were popular even amongst the middle-income group, who listed its partial withdrawal facility as the main point of attraction.
The study further shows that while majority of Indian investors especially young investors prefer investing in financial product through SIP, people in their Forties and above prefer lump sum investments. 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.
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 select based on the appropriateness of a product to the temperament of an investor.
Allow me to cite a case I remember of a young couple, both professionals and earning handsomely, but somehow perpetually facing a liquidity crunch whenever a payment commitment was due. This forced them to keep redeeming their mutual fund investments at frequent intervals, thus robbing their portfolio of the crucial compounding element that boosts returns.
Clearly, their problem was not one on the supply side as they earned well and their cash inflows were pretty impressive. Their problem area was their inability to control cash outflows, especially avoidable capital commitments like costly club memberships that they never ended up using more than a couple of times. However, their opting for not just such a capital commitment but also ‘easy’ EMI installments to pay it further compounded their problems as the interest rates levied on them were abnormally high.
Ever since they shifted to a ULIP a few years ago, there has been a cap on their expenses as it is not quite as readily redeemable as a mutual fund. In such cases, the limited liquidity for the first few years actually works as an advantage for compulsive spenders. It is hence that I for one, am hardly surprised about the results of the above mentioned survey reflecting the growing popularity of ULIPs.
Ashok Kumar
Head of LKW-India. He can be reached at ceolotus@hotmail.com