What we can do in respect of our funds under our ULIPs?

Dear Policyholders,

The Nifty is under attack and what should we make out of it. Let us see what we can do in respect of our funds under our ULIPs . I am doing the loud thinking to have a firmer opinion and list it below, pointwise :

1. Should one take some risk to avoid missing the bus when bullish moves come back, I think one should take some risk and get into equities because if the bench mark yield is 8.20 pc for 10 year paper and inversely it is 12.2 PE for it. We know that the PE for Nifty would be about 17 at the current level. There is however one difference between the two ie the PE for bonds would be static but for Nifty the growth in profits of whatever magnitude will bring the PE down every coming year. The trouble may come only when there is negative growth in profits of companies but that is unthinkable for the time being as the GDP growth remains above 8pc and expected to be so in near future.

2. There is fear that FIIs will sell further and dent Nifty. Here we seem to presume that FIIs are irrational entities and would not look at the value-price ratio while selling. In fact the sell off in 2008 was an exercise in irrationality caused by the collapse of financial system in US. There is no possibility of a similar event happening now or in near future, so down the line buying need will emerge with fall in prices beyond a level.

3. The domestic savings find way into equities to some extent and would add to demand for equities and not supply because Indian masses sell only at some profit and not at loss (short-term traders apart).

4. The follow-on public offering by companies over the last three years at premium have arrested the slide in such companies.

5. There is a lot of capacity creation by companies by ploughing back profits in to capex. This makes the base for greater profitability in good times and let's companies have assets that grow in value due to inflation but which show lower book-value due to depreciation adjustment. The writing-off cycle for most assets is far lower than the real life and residue for these assets.

6. Sector-wise :

Cement : this sector has been discounted in line with performance and should have good times ahead.

Banking : this forms a large part of Nifty and has been under price pressure though has delivered better numbers for latest quarter and no fear of further slide is seen.

Auto : this sector has seen great run-up and is on its way down which will have reached the safety point in a few more weeks. The high interest rate regime has cast some shadow on its growth prospect but the intensity of demand seen in past may not just die down so easily.

Telecom : the share prices of companies in this sector are at very low ebb already , if any thing , it may see rising fortune.

Infrastructure (including cap-goods manufacturers ) : this sector would grow in size always , the profitability may fluctuate , however, it has been robust. For example BHEL's quarter ended 12/10 delivered profit of Rs 1403 crs against Rs 790 crs of quarter ended 12/08 ( two year - double profit) .

Oil, Gas and Petroleum : this is represented by heavy -weights like ONGC and Reliance. Other are in marketing and have limited scope of going up or down. Both biggies gave out good results which are more than double of what it was in quarter ended 1208.

Pharma : this has many names with good track records, the Nifty has no worries on account of them..

Housing : this sector has little representation in Nifty and is one of the unstable ones. DLF is already down enough to worry for future.

IT : this has regained its importance and improved performance due to US economy on recovery path. They would progress and are on firmer ground. The profits have improved but prices are in normal range

Metals : there has been good capacity creation in this sector and profitability is OK, so, here also worries should remain at bay.

FMCG : this sector has best of the corporate level practices, HUL and ITC are very strong companies which would grow only in positive direction in future and keep Nifty in balance.

Power : the likes of NTPC have no parallel , the price also is on the lower side. With distribution and bill collection problems under check, power sector should remain OK and growing. Profitability of this sector is ensured.

(I have talked of sectors with particular reference to Nifty because HDFC Life's equity funds have bulk from the Nifty universe. The rest are very meticulously researched and collected and give the opportunity of beating the indices year after year. )

The Price to Book ratio is at historically low point and would put-up resistance against price fall.

The big fall in 2008 had occurred when the PE for Nifty was high at 27-28. The case is quite different this time. If there is over-selling , then the bears will take care of Nifty from going further down . You should have resurgent mood rather than sombre mood at present. This is my message. You are aware that any thing may happen , designed or otherwise , so you have to arrive at your own judgement before you convert idea into action.

The food and commodity prices have bearing on industrial economy and not so much on the rest like Pharma, IT, FMCG and services. High commodity prices give commodity producers to improve margins. High interest rates affect in a similar way. Since the industrial have far lower representation than they used to, the situation should not be taken to be very alarming.

With best wishes ,

Krishnakumar Khandelwal

Dear Policyholders,
   I am addressing again after about a month which has seen indices go up very fast and the Nifty has now reached a high level of above 5900. I have noticed pointers which indicate that a correction of about 5 to 10 % is on cards. Respecting this very observation I now advise you to transfer funds entirely in to 'secured fund' . This is for all three ie for the conservative, the moderates and also for the aggressive. 
  The RBI has raised the policy rates by a small margin but the bond prices are down and if you enter the secured fund now you also have a chance of appreciation in the bond values when the interest rates are revised downward and I expect it to happen after about six months from now. It is not that stocks have a bleak future but the risk-reward equation is at such point that the prudent investors keep funds in safe pocket and this applies more for the insurance and pension plan funds as they are for long term goals. My resolve is to advise you in way which takes care of safety as well as of decent growth. I am happy that this has been practically achieved since the time I began to advise you in these columns.
   The new plans have been introduced by companies as per the IRDA guidelines but what I find is that the charges like policy fee and fund management have been raised and the fund allocation charges in the first two years have been brought down. The fund-switching also will cost in future policies as against free switching for 24 times in a year in respect of plans sold to you so far. This makes the old plans worth more than gold, therefore please ensure that you keep paying the premium without fail and also keep topping up with every rupee that you save only on the ULIPs you already hold. You are aware that there is no withdrawal restriction or charge on your presently held policies (in a few cases the withdrawal is possible after three years, so check your policy issue date). Its only you who will have the cake and eat it too. 
  So, rejoice and enjoy your most valuable investment asset to the hilt. If you neglect to take full advantage, you are only going to damage the cause of fund growth and tax saving and hassle free management of funds.
Wishing you all the best,
Krishnakumar Khandelwal

ULIPs under regulation solely by IRDA

Dear Policyholders,
  The ULIP related controversy has ended with Govt of India issuing a notification regarding ULIPs that this product will remain under regulation solely by IRDA.You may recall that when the SEBI had tried to be spoilsport for the most successful product with Insurance Companies, I had given you the word of assurance that SEBI would not be successful in its attempt. In fact SEBI's move was in bad taste and it seemed to me that it was acting at the behest of some lobby but how can one surely say so. So, now when the ULIPs are not under cloud anymore, you should be making use of this wonderful product for your investment needs.
  I am happy to report the Growth Fund (Life) Unit's NAV has crossed 80 point mark on 21st June '10 . This is exactly 4 times the par value Rs 20 in Jan 04 when Nifty was at 2000 level. To have quadrupled the value in just 6 1/2 years is a remarkable feat. It translates in to return of almost 23% per year on compounded basis. Where else in the world such an achievement may have been made. This is superior to returns in any other asset class over the same period including Realty and Bullion.
  To further enhance your returns, I give fund switching advice from time to time which might have helped you. You may, however, master about the fund decision and my advice is no compulsion. You should be taking into account your own risk appetite and impressions about the possibilities before you resort to fund-switching. However, i am at your service at all times.
Krishna Kumar Khandelwal

SEBI and IRDA tug of war for ULIPs

Dear Policy Holders,

A raging war is going on between the two regulators ie SEBI and IRDA . SEBI says that its going to be its own baby for nursing and looking after as ULIPs has a bigger element of stock market exposure. IRDA contends that it is primarily an insurance product. I would side IRDA for various reasons. The main reason is that the insurance is a much more tricky business. The liabilities are not easily determinable on the part of companies. Only highly qualified actuaries may do it for them. There has to specialised knowledge about how the premiums are fixed and how the eventual liabilities are going to be provided for. I do not think that SEBI can match up the requirement of being a body fit to regulate insurance.

I have come across material in press and on TV programmes which have tried to throw bad light on ULIPs on account of transparency issue and also on issue of commissions. In fact, I have been educating you all about the virtues of ULIP products. It stands absolutely transparent where every single charge and possible returns are shown separately in the illustrations (IRDA has prescribed format). Also the commission is minimal in these plans which allow only under 1% commission from second or third year on the premiums paid while the traditional plans which LIC has been selling for more than fifty years bring commissions of 5% on premiums over the life time of policy besides the first year commission is much more than in ULIPs.

There is some lobby behind the efforts at tarnishing the image of a product that has been much popular with public. It has all good features and none bad. I am ready to explain to policy holders if they let me know of the point they want to clear doubts about.

Would it not impress you that most of my ULIP holders have had a very satisfying returns which have been as high as 30% per annum and none have had it less than interest on FDs with bank. Needless to say that the returns have been tax free unlike interest on FDs.

The govt has clarified that the ULIPs already issued will stay unaffected. Whatever the regulators and courts finalise in the area of regulation of ULIPs will only be applicable to new offerings of the products.

Those interested may go for the exiting products of HDFC SLIC which I assure you are with low charges and good possibility of returns which has practically been the case with my present policy holders including you, if you hold a policy from me.

I do hope that those of you have substantial funds under your policy, are paying due attention my switching advices from time to time.

Krishna Kumar Khandelwal

ULIPs are clear winners

Dear Policy Holders,

I do hope you have been continuously enjoying the benefits bestowed by the ULIPs you hold. I advise you to keep parking your savings in ULIPs you possess, as top-ups, as it would be at minimal cost and deliver all benefits due under a policy besides maintaining your short-term liquidity. The growth/gains will not be taxed even when you withdraw your gains.

For your information, the Renewal Premium under ULIPs for 6 months ended 30 Sept 09 have equaled Rs 25433 crs (up 34%) while the non-linked products have equaled Rs 36996 crs (up 10.2%). It is clear that ULIPs are finding favour with the public and rightly so because in non-linked products you lose a lot of you premium by way of higher commission paid to advisors which is normally 5% for renewal premium under such policies. The ULIP renewal or top-up attracts only 1% commission payable to advisors.

This apart, the companies have a larger share of earnings as their profit and distribute less in case of traditional non-linked policies. In case of ULIPs, they get only the fund management charge which is fixed and is low. In this light, the ULIPs are clear winners and are the exclusive platform for saving on payable taxes on returns/gains/growth.

Krishna Kumar Khandelwal

ULIPs are good for the long period of investment

Friends,

We calculate the nominal return on equity on post tax basis while we talk of yield on debt funds on pre-tax basis, clearly equal nominal returns would be preferable. The equity-advantage does not end here. Consider the folloing which reflects return on Sensex in each decade since 1980 till now:

1980-90 … +25pc p.a.

1990-00 … +30pc p.a.

1998-08 … +25pc p.a.

The yield on long-term G-Sec has ranged between 6 to 10 pc per-annum.

The difference is clearly visible. Even if you have not timed your investment decision the return in equities has never been lower than 10 pc after nursing stocks for a full 10 year period and the peak returns have been as much as +40 pc p.a.(between 1982 to 1992).

Even the gold has never been able to exceed in gains in long term (over the equity investment).

Another observation is that the longer you stay in equity investment, the more stable returns are expected. Also, if you invest after big crashes your returns are more handsome over the long period.

In this light the ULIPs are good for the period of investment is usually long for the young and middle aged people.

HariOm,
Krishna Kumar Khandelwal

MFs can not perform better than the funds under ULIPs

Friends,

I come across very many people who have leanings towards MFs. I find it difficult to explain to them that the MFs can not perform better than the funds under ULIPs because of variety of reasons.

Past and recent past experience has shown beyond doubt that the MFs have done poorly against the Bench-Mark indices while the funds under ULIPs have exceeded the returns on Bench-Mark indices. The 'growth fund ' of HDFC SLIC' has beaten the bench-mark index by a margin of over 4% over the last more than five years ie since inception.

MFs have their assets under management divided in to two many pockets and remain under pressure of redemption all the time. They therefore do not deploy entire fund available. They have higher fund management charges to take care and can not have very long term view. The ULIPs have no such problem and have continuous fund flow and can afford to have longer term view and have predetermined points of exit as per the policy terms already known.

Why then the MFs should be there at all, is the natural question that comes to mind. In fact mutual funds too have a role to play and that is in the area of sector specific funds. Those of the investors who have identified a certain sector that according to them would be giving better returns can use MF route more conveniently than do their own direct investment. Where however , an investor has interest in a particular company or set of companies, then of course the direct investing is the answer and non other pocket

I think I have given you good idea as how to use the different options available to take advantage in given situation. In this light regular savings should flow only in an Unit Linked Plan of the insurance companies, which are now having certain very valuable advantages on account of their current features like of having equity flavoured funds and bonds and debentures oriented funds besides giving the invaluable facility of allowing the policy holder to switch between the funds according to need of the hour and personal leaning. The perfect liquidity in respect of the funds is also possible after a three year period. Needless to say that in policies with life risk cover , no taxes on the gains, growth or interest earned are payable or applicable as per the section 10(10)D, before or after withdrawal. I have told only some of the advantages to keep this brief. Those interested are welcome to interact with me for more.

Hari Om

Krishna Kumar Khandelwal

Investment Wisdom over the years

Friends,

Since 1991 , investment in Sensex has appreciated to roughly about 18 times. It is also very closely correlated with the GDP growth according to Kiran Kabra. The real estate in Mumbai has grown in value by about 4 times and the bank deposits have grown roughly about 5 times since 1991 . Gold prices too has grown by 5 times since than.

In my opinion the Sensex returns are after one has continuously adjusted portfolio to represent Sensex which involved effort and attention as the Sensex composition has been altered many times. The real estate seems to have appreciated by lesser degree but it has given the benefit of occupation and use or some nominal returns by way rent but not without some costs of maintenance and taxes. The investment in Banks’ FDs and gold has been slightly less bothersome to hold.

Supposing we divide the period since 1991 in to up to 2000 and after , the returns from Sensex stocks would be far lesser than the other avenues of investment for the earlier period of nine years and would be astronomical for the period after 2000. This very character of the equity investment makes it not entirely advisable. You have to move in and move out at right times to be able have the real advantage of equity investment or else shun it. Further , you should be engaging services of some experienced consultant to guide you as an ordinary citizen can never find out when to get in out.

The ones who keep their investible funds in all the four pockets will not come to grief ever. Investment through insurance policies will be a good replacement of the need to invest in FDs of Banks and direct equity holding being easier to manage. ULIPs are getting popular for this very purpose besides being giving tax relief and saving costs.

Hari Om

Krishna Kumar Khandelwal

Sixty out of 154 MF schemes have underperformed

Friends,

Sixty out of 154 MF schemes have underperformed their benchmarks by over 30% or so in a year that saw the BSE Sensex gain over 40% according to ‘value research’. During 2006 , 85% funds legged behind the leading indices. India has 3.4 million MF investors and just 3 to 4% of total household savings find way in to MFs. The record of the funds under ULIPs of Insurance Companies is better as there size is big and they don’t remain under threat of redemption. They are also able to take longer term view of the market compared to MFs . Insurance companies are more prudent too, for they can not start new schemes after some of the existing have been spoilt as is done by MF industry.

Hari Om

Krishna Kumar Khandelwal

ULIPs more cost effective and transparent

Dear Policy Holders,

Do you know that close ended MFs charge 6% of the funds generated as fee but amortise them over a few years thus giving distorted NAVs to that extent till the charges are fully reflected? The open ended funds mostly charge 2.25% as entry fees. The govt. is contemplating to allow only 2.5% as the entry level charge for the open ended schemes also and they would have to show the NAV post this charge from the beginning itself.

Should you , therefore , not regard the ULIPs as much more cost effective and transparent . In case of the ULIPs from HDFC SLIC further top ups and premiums after two years are charged only 1% in contrast.

Hari Om

Krishna Kumar Khandelwal

Have confidence in the Unit Linked Plans

Dear Policy Holders,

Please note that Life Insurance Companies cannot out source their fund management work as per IRDA guideline and hence there would be consistency in returns and approach. They would adhere to pre-defined norms on risk and generally have a long-term view. The most critical
norm for investment manager of the insurance companies is that it is process driven with adequate stress on risk management.

I am sure you would have confidence in the Unit Linked Plans on account of this piece of regulation by IRDA. Cost cutting resorted to by the MFs by outsourcing is a factor to be wary of MFs although all must not be doing so.

Hari Om

Krishna Kumar Khandelwal

Unit Linked Plans as Investment Options: Different perspectives

by Rajbir - September 12, 2007 as published in Money Times and analysed by Krishna K Khandelwal (given in bold)

Unit Linked Plans were once hot selling plans of LIC and few other players in India. Especially after the abolition of separate sub-limits under section 80C or earlier section 88, for rebate, investor’s preference has shifted from conventional insurance policies to ULIPs. As for me, I have always been biased against taking insurance cover, though insurance policies have saved many homes from ruin after unfortunate premature death of breadwinner of a family. My main grouse against insurance policies is that they have not passed the benefit of increasing average age to the investor and it relies too much on exploiting social fabric and high incentives to agents to trick public into policies. (I beg to differ here, the mortality charges have become lower, and it was only until the LIC was in the field that it was keeping the rising age advantage to itself but the scene has changed. The HDFC Std Life Ins Co even has lower rates for women as they have low mortality as compared to men)

When mutual funds, IPOs, Post Office agents get no more than one odd percent of investment, why should insurance agents get something link upwards of 30% and sometimes touching 50% and then for life for every installment. This high incentive straightway hits return that an investor hopes to earn.( Here also the perception is misplaced, the insurance selling involves much more effort than selling a MF product or Post Office deposit. Further, apart from the extra effort involved in selecting a plan, the term and other riders according to age, the constitution of family, the income size and the job profile, the possibility of the proposal converting in to a policy depends on the medicals undertaken which involves cost for the company and if rejected, it costs to agent as well as the company without any gain. Besides the extra commission is for the initial year and only on premium from the first year and not for the rest of the policy period. In case of ULIPs of big-ticket investment in pension plans, the charges come to far lower percentage than even the MFs)

Even Unit Linked Plans are being sold to gullible investors as they net higher commission; still they are better than Pure Insurance Products. Here are a few key answers you must know before deciding about investing in these.( Both types of plans have some special features, actually the selection of capable adviser is a must otherwise 'Neem Hakim Khatarey Jaan' is true in case of insurance products.)

How it befools a consumer.

Unit Linked Insurance Plans typically are a mutual fund type investment where a part of the earnings is diverted towards insuring your life. (Again, the wrong impression, this covers two needs in a beautiful way. When your investment gets growing, the risk cover amount gets automatically reduced and the charges become low accordingly while the primary objective of provision for the family in case of unfortunate death of income earner is fully met)

Part of annual installment you pay comprises of annual insurance premium and balance is invested as mutual fund. Now as the returns on insurance are pathetically low, average returns as worked out by adding mutual fund return and insurance return work out to be better than typical insurance policy; and hence apparently such products appear attractive on the first instance. (There is an evidence that the MFs have not performed better overall than the Funds in ULIPs. Actually the MFs present before you the best performing schemes only and do not give investor the idea of the poor performing schemes which are far more in number than the good performing schemes where as the ULIPs have only one scheme in a category i.e. Growth, Balanced, Defensive and Secured etc and hence there is full disclosure available. The second reason is the size of MF schemes and a certain category of big investor getting advantage by moving out at crucial junctures and harming the others being privy to some information due to connections in side the MF organisation. You may recall as to how a big-ticket corporate investor moved out of Unit Trust's UNIT 64 scheme leaving others in lurch, which even raised a mini political storm too. This type of happening may not happen in case of insurance company products. Insurance companies have far more prudence being the long-term capital/asset managers)

You are not able to choose the type of mutual fund such as whether diverse of mid cap or debt fund etc. Then here the question comes, why not invest yourself part in mutual fund of your choice as SIP and part as insurance premium?( This is right , the ULIPs do not offer this sort of choice, those who are savvy enough in knowing the sectoral advantages and the scrip specific advantage may choose the routes of direct investing. However, it must be remembered that none of your investible funds should exposed to such risks. Supposing the death f income earner occurs just at a time when the market is down the loss will be very difficult to sustain even may make life of the family so orphaned very difficult and ULIPs keep you safe by this angle.)

At least you would be able to choose the type of fund yourself. The answer is Firm Yes! If you are a bit educated investor then do go for such arrangement. ULIP is for naïve investors and the ULIPs deliver average return only.( The switching between the funds is without cost or negligible cost and saving the fund value in uncertain times is a mighty advantage even for the market savvy investor. The tax advantage and saving of impact cost and time value of money in practicing it is again a valuable advantage. These advantages are just not possible with any other type of saving or investment scheme.)

These products typically come with a three-year lock-in period. A typical ULIP plan will have the following components: insurance premium towards your life and investments in different asset classes. Some ULIP plans now offer choice of plans as whether to invest only in equities or to invest in 70:30 equity and debt etc. The buyer is allowed a limited number of switches between the plans. (This is perfectly true)

Typically, in an ULIP plan about 25% of the premium is allocated towards insurance, commission of about 10% in first year (this gets reduced to 5 percent in later years), administration charges of 1.5 % percent are charged.( This very factually wrong, firstly the ratios given is wrong by a wide margin, these should be checked out first secondly without speaking for other companies , I may say that in ULIPs from the HDFC SLIC stable charge only 1% from the second year and/or third year and there fund management charge is also just 0.8% )

You need to understand following before subscribing to ULIP

1. Choose proper fund type before choosing a plan.

2. Before you decide no to pay a premium or plan to withdraw funds ensure that there is enough left to cover mortality charges and other administrative charges. The insurance cover may lapse without your knowing it.

3. Try to understand the fund management and return; believe me it is not going to be tough.

Take following precautions

1. Don't get taken in by past record of a particular scheme. Rather go by the fund manager. Past record of a particular scheme could be an aberration or may be the markets moved that way during a period.

Example; when markets rose by about 50% in 2006, any fund that gave just 50% annualized return should be counted as an average fund only and not a progressive one.

2. Don't buy a ULIP on the promise that you no longer have to pay your premiums after the third year and that you can withdraw funds anytime. (You do have the advantage of part withdrawals in UNIP with exception of UL Pension Plans and there is evidence that HDFC SLICs Growth Fund under ULIPs has beaten the benchmark index by a good percentage points through out its existence since Jan 04)

(The opinion in bracket is of Krishna Kumar Khandelwal, Certified Financial Consultant with HDFC SLIC)

Benefits of Life Insurance (as a savings/investment medium) Over Real Estate (as an investment medium)

Sr. No.	Attribute		Life Insurance			Real Estate
1	Taxability aspects of maturity/ returns proceeds.		Maturity/Claim is tax free under section 10(10D)			Short term / long term captial gains applicable.
2	Risk Coverage		Risk coverage/protection for the nominee/beneficiary, in case of death.			No risk coverage.
3	Inherent nature of Risk in the savings/investment medium.		No risk associated with this medium. The medium has been tried and tested. The returns are very secure and decent.			Inherent risk associated with this medium. Most of the civil disputes in the civil courts today, pertain to real estate (multiple ownership claims of title deeds/people other than the title owner squatting on the estate, etc.)
4	Tax Rebates under Section 80C		Applicable			Not applicable
5	Protection of asset in case of bankruptcy/court decree for seizure of asset.		Absoute protection for the asset in case of endorsements under MWPA.			No such protection available. The asset could be seized/frozen in case of court decree/bankruptcy/seizure by the financer of asset
6	Liquidity		Liquidity is comparatively higher (subject to policy acquiring surrender value).			Liquidity is comparatively lower. It is not easy to sell real estate in times of emergency, easily.
7	Securing dreams of family		Life Insurance helps a person to be assured of fulfilment of dreams (Child's higher education/marriage) irrespective of whether he is alive till the occasion OR not.			No such security is there in case of real estate. The client can invest only till the time he is alive.
8	Using Life Insurance for planning for post retirement life		The client could plan for a decent life, with dignity and self-respect, with regular flow of income after retirement from work, for himself and wife, till the time of last survivor of the two.			It is certainly not prudent to depend on the real estate built, for the post-retired life. Even assuming that the client sells off his asset after retirement, it may not be easy to say no to children who may want to use the proceeds from the sale of real estate for their own use.
9	Chance for maximising returns		In UL products, the client could use the switching options available, for maximimising returns.			No options available for maximising returns, except depending on the market.