Ulip managers fare poorly in Sensex test

It's a cover drive that has worked well for the insurance industry. When the captain and the vice-captain of the country's cricket squad teams up with a former captain and ask you to buy insurance, you are most likely to be bowled over.

And if this campaign has helped insurers in raising a lot of money, especially through their Unit-linked insurance plans (Ulips), no one's going to be surprised.

Good beginning. But the story's changing as the innings progress.

Though Ulips have raised more than Rs 30,000 crore as new business premium in the last financial year, a study by DNA Money shows that most of the equity Ulips failed to beat the returns generated by the Sensex in the last one year (July 25, 2006, to July 24, 2007).

Of the 23 equity Ulips from 10 private life insurance companies that the study compared, only seven managed to generate returns higher than that of the Sensex's 51.6 per cent. The average return generated by an equity Ulip during the period was 49.4 per cent.

Equity-linked savings schemes (ELSS), better known as tax-savings scheme, scored a much better 57.8 per cent.

In fact, even in a two-year period, none the 16 Ulips that have been in existence have been able to beat the Sensex return of 45.1 per cent per annum. The average return delivered by Ulips over this period is a much lower 38.8 per cent. Before you jump into any conclusion at this juncture, let's hear the Ulip side of the story.

"It is too early to compare Ulip returns with mutual funds' (MFs) as Ulips have been launched only for 3-4 years now," says Sanjay Tripathy, head, marketing, HDFC Standard Life.

Point.

But then, one should remember that individuals hand over money to insurance companies on the belief that experts handle their investments better.

An expert is deemed to have done well when he generates returns that are greater than the broad market. The Ulips, clearly, seem to have floored the experts.

Some plans, indeed, did beat the Sensex - but just by a whisker.

The pick of the lot over a one-year period has been Tata AIG's Equity Fund, with a return of 64.4 per cent. Coming close was Kotak Life Insurance's Aggressive Growth Fund, which generated returns of 59.7 per cent. Five other funds, which managed to beat the Sensex, did it by 1-2 per cent.

"We have beaten our benchmark BSE 100 by 2-3 per cent over the past three years. Not all managers have been able to do over time," says Bryce Johns, development actuary and chief investment officer at Kotak Mahindra Old Mutual Life Insurance.

Why did others fail?

"As your portfolio gets bigger, it gets difficult to beat the market. Also we can invest for a longer period, as we have no redemption pressures that mutual funds have. People save for a 20-year time horizon," he added.

What one needs to be kept in mind here is that the returns we are talking about are the returns earned on the portion of the premium that is invested and not on the entire premium paid.

Most Ulips have a premium allocation charge in the first year of the policy, which varies from 15-71 per cent of the premium paid, depending on the Ulip chosen. In the second year, this charge is around 15 per cent of the premium paid. The amount that remains after paying this charge is invested. Hence, the actual return for the investors is a lot lower.

"Most investors aren't aware and, more importantly, aren't made aware of the high upfront expense. By the time they find out, it is too late. These expenses directly eat into returns," says Sandeep Shanbhag, director, A N Shanbhag NR Group, a tax and investment consultancy.

"The damage done by high costs in the initial years by Ulips is very high. This, along with the MFs' out performance of Ulips, ensure that there is a huge lead in the initial few years in terms of the corpus," says Amar Pandit, who runs My Financial Advisor.

Insurers do not agree with this. "The entry load for an Ulip is in the range of 10-25 per cent, which is fully refunded in the form of loyalty bonus to the customer who stays for the duration of the contract. In fact, the loyalty bonus in our case can go as high as 100 per cent, if the customer stays on for 20 years," says Rajiv Kumar Gupta, senior vice-president, retail and corporate agency, SBI Life. Those cricketers don't seem to believe in one-dayers.

Source: DNA Money