Mr.Bala wrote : “Thank you
Mr.Srikanth for your invaluable suggestions and advise through your
blogs and facebook updates. Please continue this yeoman service.
I had invested Rs.60000/- in X
Insurance company ULIPs after my cousin who is an agent with this X
Insurance Company convinced me with the product throughout colorful
brochures and PowerPoint presentation.
Sadly, my investment is showing a
negative return of 37% and the value is now about Rs.38000/-. The
scheme has a provision of Additional purchase. Shall I buy more of
the same ULIP to average the same and reduce my cost?”.
SRIKANTH MATRUBAI
replied :
Mr.Bala, thanks for your kind words.
It pains me to read such letters. I
only hope people realise faster that ULIPs are money minting machines
for Insurance Agents and a BIG LOSS for Investors. I repeat again
Insurance is NOT an Investment.
Trying to time your investment, be it
ULIP, mutual funds, stocks is not a wise thing to do. Investing
though Systematic Investment Plans (SIP) which does the Auto timing
of the Market job for us is the BEST way to invest.
FIRST UNDERSTAND ULIPS:
ULIPs are Unit Linked Insurance Plans
and are similar to Mutual Funds with regards to their structure and
functioning. But that’s where the similarity ends.
ULIPs are Long Term Investment Products
and you need to stay invested for 10 years at least for you to reap
the benefits of ULIPs. But since ULIPs do provide Insurance cover,
there are mortality charges and hence part of your investment goes
into Mortality Charges for Insurance and only the balance part of
your money goes into the Stock Markets for buying Units.
In a ULIP, the insurance component is
very very low and does NOT serve the purpose of Family Protection.
Due to the many hidden charges like Policy Admin Charges, Allocation
Charges, Fund Management Charges, and all types of atrocious charges,
ULIPs are designed to ensure maximum benefit for the
Insurance Companies and Insurance
Agents and NOT THE
INVESTOR!!!! The commission is as high as 40%. This
commission is paid by YOU and taken from YOUR pocket.
are attractively packaged and tempt you but you are the LOSER in this
investment avenue.
Look at the charges between
Mutual Funds and ULIPs.
1. Entry Load - It can be avoided if
you invest directly to your MF bypassing your MF agent.
2. Exit Load - It can also be avoided
by remaining invested for certain time period in that particular
plan.
3. Fund Management Charge - Its charged
as a %age of total assets under the plan. Normally it varies from
0.25% to 2.5% depending upon type of funds (Debt to Equity.) as well
as expertise of fund co. for a same set of MF plans, lower FMC Plan
is always advisable for investment.
In case of ULIP following 4 types
of charge are applicable.
1. Premium allocation Charge - It may
vary from as low as 1% to as high as 65-70% of your first year
premium& reduced year after year or may remain same at a constant
level say 4% or 5%.
2. Mortality Charges = Its the basic
cost of insurance & again it varies among Ins. cos.
3. Policy admin charges - Some ULIPs
charge as low as 20 Rs. per month where as some charge as high as
200-300 Rs. per month. Again not constant among Ins. cos.
4. Fund Management charges - From 0.5%
to 2.5% depending upon the type of Fund (debt to Equity).
There are other charges too like
Surrender Charges, Fund Switching Charges,etc, but they can be
negated with some help from your financial advisor.
Never invest in ULIPs unless you are
investing for more than 15 years. Invest in ULIPs only if the offer
is really worthy.
OTHER RISKS WITH ULIPS:
- When you choose a ULIP Plan, you are marrying to the funds that are packaged with it, if performance of the funds are not good, you got no choice.
- Since majority of ULIPs are annual premiums, there is a significant risk of ‘market timing’ with ULIPs.
-
Insurance is NOT investment.
ULIPs work out well only if your
investment horizon is more than 10 years at the least. 10th year is
the break even year when ULIP plan takes over the mutual fund. So, an
investor needs to stay in ULIP Plan for very long time to beat mutual
fund+term solution.
This is because ULIPs have Charges
which are very very high, sometimes in the range of even 60%!!!!!
Be aware of these charges.
Mutual Funds are much much better
compared especially now that Mutual Funds have 'no entry' load, which
makes Mutual Funds very very cheap.
Both Mutual Funds and ULIPs invest in
similar assets and thus should normally replicate each others
performance. But this is very rare because of the High Charges levied
by ULIPs.
MF give you more flexibility. Ulip are
are more enforced kind of product.
Avoid ULIPs at all Cost.
Instead take Term Insurance, which is
the Cheapest Insurance and then invest the difference in Premium
saved into Mutual Funds.
You will make much much more money than
investing in ULIPs.
As for timing, there is never a good
time or a bad time to start invesment.
Pure Term Plans should be your Top Most
priority.
NEVER MIX INSURANCE WITH
INVESTMENT:
The Purpose of Insurance is to PROTECT
your family in case of any exigencies. The purpose of investment is
to BUILD WEALTH.
You are under loss and will continue to
be even if the market BOOMS again!!!!
The reason is simple. Your investment
is in ULIP. and in ULIP, your investment of 15000 is not invested
fully.
40% of this goes to the Agent as
commission. Yes, 6000 out of 15000 goes to agent. The money is paid
out of your investment and not out of the Insurance Company's
pockets.
So, in effect only 9000 is invested.
Now just imagine how much the market has to go up just for your 9000
to reach your invested amount of 15000.
IN CONCLUSION :
ULIPs come with lot of inflexibile terms. A very important but
often overlooked disadvantage is that if the fund manager stops
performing you cannot easily come out of the fund as you have already
paid huge charges and remaining invested is your only option.
On
the other hand, you can easily do so in a mutual fund as exit loads
are zero after a year.
Of course, if you are assuming ULIP
also comes with an insurance cover attached, that is wrong. You are
paying a fee for the insurance. It is not free.
So, promise yourself, that you will
NEVER EVER invest in ULIP.
ULIPs are a costlier, less transparent
version of Mutual Fund.
Invest in a Good Mutual fund under the
guidance of good Financial Advisor.
Instead of paying 40% commission to
ULIP Insurance agent, pay your Financial Advisor a good Amount as
Consultation charge.
Best of luck,
Srikanth Matrubai
