Thursday, January 28, 2010

Comparing ULIP Fund Performance

Come Dec/ Jan and there is a big rush of insurance and investment companies and agents to cash in on the tax saving season. They would be the best aware that the typical salaried class would think about investments and tax savings only when their respective finance departments send the deadline for submitting tax saving receipts in Jan/ Feb - "Show the receipts or get taxed (heavily) during the last 2 - 3 months)!".

So I was not surprised when I got a call from a relatively new private insurer last month. As in typical sales talk, they said they had something exclusive for me, which they wanted to present to me in detail. I decided to play along, as i was impressed with their aggressive pricing in some of their other products and marketing strategies.

 Just a few minutes of talk during our meeting, and i could easily make out that they wanted to sell one of their unit linked plans to me - a guaranteed plan, a wealth grower or a pension plan - with the scale of push in that order. Expectedly, they were not really bothered about the amount of cover i had/ needed.

To make it simple, given below is a gist of some of their sales statements and my counter questions:
  • Them: Plan A has a 80% NAV guarantee; so the principal is always protected in case of a fall
    Me: If it has a guarantee, then it must be heavy on debt than equity, right?

  • Them: Plan B has provided close to 85% growth in last 6 months
    Me: Impressive. But what about the benchmark performance during the same period?

  • Them: Since the company is new, the NAV is relatively lower than that for mutual funds/ other companies
    Me: So what? Does low NAV mean better returns?

  • Them: Since we are an insurance company, our investing style is not that aggressive as that of a mutual fund company?
    Me: Low risk means low returns, right? And aren't there mutual funds available for these different investing styles?

  • Them: Our charges are one of the lowest in the industry.
    Me: Can you give me a detailed illustration with all the charges, so that i can study these plans in detail?

None of my questions, got a clear answer. Our conversation ended after i was handed over some print outs and brochures and exchanging business cards. As promised, i was sent an illustration of all three plans.

The illustration came in an excel sheet as i requested and hence it was easy for me to do some analysis. The illustration assumed a lavish growth rate of 25% per annum and conveniently avoided policy administration charges and mortality charges. For one of the plans as per the calculations, if I invest Rs.100,000 for 4 years, at the end of 25 years I will end up with a corpus of 5.6 crores. Impressive at first glance. Add to that, the fact that their charges are low in comparison many other insurers. And remember the finance department breathing down our necks? These factors would push most of us to say yes to one of the above plans.

But wait a minute. The illustration that was given to me showed annual returns of 25% - a clear violation of IRDA rules and regulations, that specify that illustrations cannot be provided to investors for returns in excess of 10%. If I bring down the returns to 10% (from 25%), the corpus at the end of 25 years reduces to a mere 27.2 lakhs (from 5.6 crores).

It is also very important to validate two things in any ULIP. (1) The charges and (2) The fund performance.

Charges are tricky in any ULIP. ULIPs usually have different charges (Premium allocation charges, Fund management charges, mortality charges, etc), at different time periods (at the start of investment, monthly and yearly), charged in different ways (deducting from investment and deducting units). 1 to 1 comparison between various ULIPs (even within the same insurer) can be a maddening experience. But in this case, it looked (confession: I am not an insurance expert) relatively alright.

Unlike in the case of mutual funds, the fund performance of unit linked plans are not easily available. Fund performance comparison across various insurance companies are much more difficult. The best option is to go to the insurer's website and then look for NAV performances. In this case, the insurer had various funds such as Wealth Grower, Balanced, Debt, Pension, Guaranteed Plan, etc. For the selected time period i compared the fund return against two large cap oriented defensive funds (Birla Sunlife Frontline Equity and HDFC Top 200). The results were shocking (See excel sheet). Not only were the funds low performing, it lagged behind the two mutual funds by a good margin.

No prizes for guessing what my response was when the insurer called me for the next appointment.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.


smartmoneyindia said...

Great blog..

keep it up...

Nikhil Shah

Ganesh said...

Thanks Nikhil!

Srinivas Girigowda said...

well written. very useful. thanks

Ganesh said...

Thank you Srinivas!!

laxman said...

Well written but i guess your comparision paramaters were not good enough, you could have taken performance reports since inception and should have compared.please can you try it, would await for your response.Also you have acknowledged the fact of aggressive funds as in the case of mutual funds and the litimations prescribed by IRDA for investments and exposure ratios. Please enlighten us..

Ganesh said...

Dear Laxman,
Thank you for your comments.

The comparison is for the same period, for MF as well as ULIP. In fact, if i remember correctly, the values for ULIP are taken from inception date only. That's why you see different dates for the comparison. I took the inception date for ULIP fund and took the corresponding date range for MF.

"aggressive funds as in the case of mutual funds and the litimations prescribed by IRDA for investments and exposure ratios" - Not sure if i mentioned anything like that in my post.. did i?

The point that i wanted to convey was that insurer takes a sales ploy and says that insurance funds are not that aggressive (and hence safe). My argument is that irrespective of it being a ULIP or MF, funds can be aggressive or defensive. It depends (just) on the fund theme!

As for IRDA, they specify that returns can be shown for illustrations at 6% or 10% only. But advisors show it for 25%. Now is it not a violation of rules and norms??

By the way, the example is based on a real life example.