How To Manage Your ULIPs

ULIPs are a cocktail of an insurance policy and market-linked investments wherein a certain proportion of the premium paid is invested in market-linked instruments like equities and bonds (depending on the scheme) and the balance is used to provide for the expenses incurred on providing you with an insurance cover.

ULIPs were launched during one of the biggest bull phases in India. As a result, they were major beneficiaries of the unidirectional rise in stock markets. This coupled with maximum sales commissions being offered on sale of ULIPs played a key role in them being aggressively sold to gullible investors. Consequently, many investors ended up buying ULIPs for all the incorrect reasons. Just as disturbingly, a lot of investors chose the riskier diversified equity and midcap equity plans in a bid to gain higher returns. All was hunky dory until the markets tanked from 21,000 to 13,000, many investors not knowing what they had been hit by. It is believed that ULIP investors are the most stunned by the market downturn.

They are very worried to see massive erosion in their ULIP investments. It's not surprising therefore, to find investors complaining that their ULIPs have fallen to such levels that do not even cover the premiums paid so far. Add to this the fact that many investors have invested in ULIPs for very important long-term goals such as their children's education or retirement and one can better understand their cause of worry. For this reason, ULIP investors want to know if they should continue with their policies.

Their anxiety emanating from two reasons in particular: (1) the steep expenses on ULIPs, overlooked in the rally, are beginning to pinch the investor now, (2) with markets in a decline, investors are not sure if they should be investing in equities at this stage. What should investors do in such a scenario?

Scenario 1: Investors who have bought ULIPs as a short-term investment will find themselves in a situation they would have rather avoided. They have themselves to blame. They have probably opted for a ULIP either because they of attractive returns or merely for the tax benefit. They should decide whether they should continue the ULIP or not. While the instinctive reaction could be to exit the ULIP, experts guide against hasty decision. Instead, one should interact with the insurance advisor and minimise losses.

Scenario 2: Investors who have opted for a ULIP with a clearly defined long-term objective (daughter's marriage, whole-life insurance etc.), have a long-enough investment tenure (at least 10 years) and can take on the risk involved, must stay the course and remain invested in the ULIP. The fact remains that over the long-term, if well selected, equities can add considerably to the investor's portfolio. One must, however, be prepared for sporadic volatility.

If you are in it for the long haul, ensure that the ULIP you have invested in is a well-managed one. To find out how your ULIP is doing, investors would do well to study the portfolios of their ULIPs and find out if the investment style is in line with the pre-defined objectives. Also, investors should compare the performance of their ULIPs with that of the benchmark indices and similar offerings from other companies. The insurance advisor can help in procuring all this information.

Take home - ULIPs are positioned as a long-term wealth generation tool that simultaneously offers insurance.[PAGE BREAK]

Given the steep charges in the initial years, there is no point withdrawing money from the ULIP in the first 3-5 years unless of course you are strapped for cash. Moreover, staying away from equities may not be the best thing as equities are the only products that have historically generated the returns to achieve your financial goals.

You can, however, always reduce your equity exposure. Equity delivers in the long run and experts reckon that the long-term bull market in Indian equities is intact. Hence, the short-term weakness can be used as an opportunity to enter into equities and equity-linked investment products such as ULIPs. Exiting in distress from the equity markets at this stage may not be a wise thing to do.