Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Personal Finance

Why You Shouldn't Buy ULIPs: After We Confuse You, We Underperform Everything

I don’t generally write about ULIPs but once in a while it’s useful to see how bad these products have been. We wrote a long post about HDFC Crest which was being missold by bankers as if it was a fixed deposit.

See: Don’t Buy HDFC Crest, It’s Not a Fixed Deposit

Now there are many reasons why the ULIP is a bad product.

  • Very little insurance
  • Useless Guarantee
  • High Costs (that are removed as fees in terms of number of units, thus making it non-transparent too!)
  • Elusive Tax Benefits
  • And Lastly Substandard returns compared to other instruments.

But Just Compare Returns, No?

Forget all the fees and all that. That’s highway robbery and terribly disgusting behaviour but what you can do, these are relationship managers with targets who don’t give a damn. One day, banks will be classified as brokers and we’ll get our day in court. Meanwhile, let’s see how bad the performance of a ULIP is.

If you take the same HDFC Crest for the last five years and compare it with a tax-saving fund from the same brand- HDFC – you will find the comparison simple. NAV or Net Asset Value Per Unit is simply how your corpus has multiplied over years.

image

Essentially:

  • Both the HDFC Crest ULIP options – there are multiple but we chose two, the Bluechip Fund and the Opportunities Fund – have underperformed the same brand’s Mutual Fund called HDFC Long Term Advantage Fund.
  • And has underperfomed by 8%!
  • As in, you would have made 8% more if you invested in the mutual fund instead.
  • You think they’ve at least beaten the Nifty? Ooh. But hang on, Nifty has a 2% dividend per year – add that and the Nifty would have beaten it.

Agents will tell you – but we give you insurance. Sure but the insurance is cut from  your corpus (not the NAV) and you can get a way better deal by using a term plan instead. (The post has the calculations)

ULIP sellers tell you they have “lower management fees”. Guess what, the lower management fee is supposed to reflect in a better NAV performance (since management fees are the only fees to be deducted while calculating NAV). But when you look at the chart above, it’s obvious this is just a flimsy excuse.

If you were missold this policy the least the insurer could have done is at least make it up through performance. But No. Just do not buy ULIPs.

  • BRS says:

    Good one, Deepak.
    Last week, I was given a creative reason to invest in ULIP, with funds coming from my equity corpus. I was told that it is almost certain that equity returns will be taxed in future (30%) and ULIPs will remain non-taxable.
    I chose to shoulder my arms and leave this delivery , so that it harmlessly sails over the stumps, if you know what I mean ๐Ÿ™‚

  • Nalin says:

    Hi Deepak,
    At the outset I must admit that I work for life insurance company as an equity analyst and therefore my views might be coloured.
    Your post is well reasoned. However, here a few more points to ponder.
    1. The MF you is mention is rated 3 stars by morningstar, while the life insurance fund is rated 2 stars. So there might be a selection bias. Most of the large funds managed my firm are rated 5 stars by morningstar and they are as good as 5 star mutual funds.
    2. Insurance funds have seem pretty substantial redemtpions (unlike mfs) in the recent past therefore performance may be lacking. However this may not be true for HDFC SL.
    3. I checked your math. In ulips, mortality charge (risk charge, i think in ur excel) is a multiple of the difference between sum assured and the corpus. Therefore, it comes down substantially each year and after a few years no mortality charge might be payable (depending on how fast the corpus is growing). That might be a mistake in your computation. Actually it might also depend on the rules of the insurance product chosen. This is how we calculate mortality charge.
    4. There are significant loyalty benefits, if policy holders retains the policy over 10 years.
    In my calculation, if ur investment horizon is longer than 6 years you will be better off with a ULIP.
    A secret – insurance companies are not making money on ULIPs and are not promoted them any more. Atleast we are not. If we are not making money, the agents are not making any money in case, the surplus must be going to the customer.
    to conclude, if u need insurance and also need to invest (with an investment horizon of greater than six years), ULIPS are a far better option. Over 1% per annum excess return over 15 yrs; this excludes loyalty benefit. There are many other benefits. But will reserve that for later.
    happy investing!

    • Could you let me know which firm you work for so we can “objectively” compare funds? HDFC Crest is highlighted because it was missoled. The star rating doesn’t matter – no one cares about morningstar ratings or such, honestly.
      Wait, you work for Tata AIA right? Tell me the name of the best ULIP you have, and I would like to compare its performance with a rock solid mutual fund. Just Nav to Nav.
      Mortality charges – I have used the ACTUAL MORTALITY CHARGE given by teh company. If your ULIP is different, you can plug in that for the charge and see how it changes.
      Add all the loyalty benefits or anything else, it is unlikely to come anywhere close to a regular plan.
      Tell you what, why don’t you tell me the name of your best ULIP and I’ll do a comparison – give me something that’s been around for three years at least.
      I’ve given my calculations – please put yours out as well, so we can cross verify. I can guarantee that none of your policies are making 1% excess return over a similar term+mf plan. With all benefits included.

  • Nalin says:

    One of our better performing large cap funds is – Super Select Equity. The returns in 5yr/ 3yr/ 1yr/ YTD are 15.79 /27.06 /25.81 /10.0
    Source: http://morningstar.in/insurance/f00000h5m8/tata-aia-life-super-select-equity-fund/overview.aspx
    Large Cap MFs that are rated ‘Gold’ standard by MorningStar-
    HDFC Equity Fund: 12.86 /21.32 /10.81 /-0.32 (Source: http://www.morningstar.in/mutualfunds/f0gbr06rmj/hdfc-equity-fund-growth/overview.aspx)
    HDFC Top 200: 11.68 /18.83 /9.2 /-1.62 (Source: http://www.morningstar.in/mutualfunds/f0gbr06rou/hdfc-top-200-fund-growth/overview.aspx)
    Franflin India Blue Chip: 12.64 /18.9 /20.51 /5.92 (Source: http://www.morningstar.in/mutualfunds/f0gbr06shm/franklin-india-bluechip-fund-growth/overview.aspx)
    Franklin India Prima Plus: 16.84 /26.47 /31.4 /6.71 (Source: http://www.morningstar.in/mutualfunds/f0gbr06si1/franklin-india-prima-plus-fund-growth/overview.aspx)
    DSP BlackRock Top 100: 11.09 /17.39 /13.23 /2.32 (Source: http://www.morningstar.in/mutualfunds/f0gbr06sf1/dsp-blackrock-top-100-equity-fund-growth/overview.aspx)
    Yes FT Prima Plus is outperforming us by 80 bips, but we are doing better than the rest.
    One of our better performing mid cap funds is – Whole Life Mid Cap. The returns are 19.84 /35.21/ 41.25 /13.47
    Source: http://www.morningstar.in/insurance/f00000h5ml/tata-aia-life-whole-life-mid-cap-equity-fund/overview.aspx
    HDFC Mid Cap Opportunities (the only Gold rated mid cap fund on MorningStar): 20.91 /31.49 /30.04 /3.91
    Source: http://www.morningstar.in/mutualfunds/f000000i3z/hdfc-mid-cap-opportunities-fund-growth/overview.aspx
    They trump us in 5 yr return; all other time periods we fair slightly better
    Obviously we arent the best. However, we might be atleast as good as the some of the good mutual funds around. The limited point is brushing the entire industry with one stroke is not fair.
    PS: I am completely relying on Morning Star info.

    • Ok lemme check. I don’t care about ratings, so I’m just going to look at Value research’s top funds.
      On Midcap: If I take the top returns by 5 year, and choose the fourth best fund, SBI Magnum Midcap, it has 5/3/1 of 21.84/40/43 % which is better than the Tata AIA Whole life midcap of 19.84/35/41 .
      (https://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=2662)
      There are many others in the midcap stream that have beaten, as you can see.
      In large cap equity you’re right, Prima plus has beaten your best fund in 5 year but the Select Equity fund’s 5 yr performance is impressive. For super select equity. The fund has done really well on 3 yr too (and 1 year, it’s within the top 20 for all mutual funds) This is good, but honestly it would not be the choice of fund at all. Apparently this fund doesn’t invest in banks or tobacco or movies and stuff and the objective is “income distribution”. In effect, its outperformance is largely due to the current market conditions, but you would never have selected it if you wanted a high risk high return – for which you would only select your most aggressive fund which is your large cap equity fund. Which is:
      http://www.morningstar.in/insurance/f00000h5m4/tata-aia-life-life-large-cap-equity-fund/overview.aspx
      And that has a substantially lower return.
      In fact, if you chose a Super Select Equity fund, tehn you would hae to compare it with an IDFC Premier Equity fund which has the same kind of stock selection, and IDFC Premier Equity has a 5/3/1 yr perfomrance of 19%/29%/30% which you would admit is far superior to your fund.
      Unfortunately even this Tata AIA fund isn’t available in any of your new ULIPs. And I found a brochure of one of your old ULIPs that actually has it: http://www.tataaia.com/pdf/iaflexisupreme.pdf . You have Large cap equity, Mid cap equity, Select equity, Aggressive growth – all as choices, isn’t this unnecessarily confusing? (the latest choices are better but just marginally) One should know which to select – in fact, your choice of ufnd
      Apart from that you have an allocation charge 1-2%, a monthly charge that’s about 2% a year for a 50K per yr policy, and so on. These will further pull down your return, SUBSTANTIALLY.
      This is why I believe ULIPs have a bad return. They confuse you, and force you into suboptimal choices. And in general, the msot “aggressive” equity option has underperformed the equivalent MF options

  • shankar says:

    and this ayyo performance is before all the charges kick in !!

  • Nalin says:

    Hi Deepak,
    1. Premium allocation charge is percentage of the premium and not the corpus. MFs charge 2 to 2.5 of the corpus as management fees. Insurance cos charge 1 to 1.5 pc. Over a longish period that’s a pretty big difference.
    2. The reason why we are not able to sell those is funds is regulatory. The entire industry has faced this issue.
    3. There are many regulatory restrictions on how we can position the fund which impact relative performance vis a vis mfs.
    4. On Morningstar, I don’t hold a brief for them but their rating methodology is very scientific. For instance, u look at any fund management academic litersture, it talks about information ratio, fund performance during bear markets etc as real test of performance. basing performance on just returns is like choosing job based on just the pay. I am not sure of valueresearchonlines methodology as they don’t discuss insurance funds much, but globally fund managers are ready to give one arm and leg for favourable word from Morningstar.
    5. Finally, regarding underperformance of certain funds, the industry has faced the spectre continuous redemptions. That has a very significant impact on performance. (E.g. allocation to illiquid mid caps in a large cap fund). wether it is structural or cyclical or one time, I would leave that your judgement.
    Thanks. I’m done. ๐Ÿ™‚

    • Nalin,
      1. I know the premium alloc charges apply to yealy amount etc.. All that is theory. If you apply ACTUAL performance of the MF versus the ACTUAL performance (not just NAV, including all costs) of a ULIP, the ULIP is nearly guaranteed to lose! Why don’t you do this. Give me the actual statement of a customer with say a 10 to 15 lakh sum assured including all charges (blank out names and addresses) with select equity, and I’ll construct a similar structure for an MF+Term Plan and we’ll compare? Lets use an ordinary perfomer like HDFC Equity and an outperformer like IDFC Premier Equity to see how it goes.
      2. Regulatory is fine, but then why don’t you have that performance in funds that are supposed to be aggressive? If your regular large cap equity funds don’t perform as well, then it’s just comparing outliers – I would compare a HDFC eqiuty even though it’s not one of the best performers.
      4. Morningstar – this is an insti obsession. I’ve met gazilions of investors and they don’t care, and shouldn’t, in my opinion. They don’t rate some excellent funds, and rate some crap funds as high class. That’s why we don’t care and shouldn’t. Ratings are institutional madnesses because they can’t find solace in the only rating that matters: performance.
      5. I don’t think your “redemption” issues are any different from mutual funds, so I don’t think that matters. Plus, given how your redemption ratios are (typically out after 3 to 5 years), it should be fairly easy to calculate when you will get redemptions, and you generally take much longer to pay out a redemption than say a mutual fund. So no, that statistic is actually in the ULIP industry’s favour, versus mutual funds.
      Happy to discuss further but I think we should do facts and numbers. Opinions exist everywhere, they’re like rating agencies.