Each of these Ulips has multiple fund options, that is, equity, debt, balance, etc, depending on the proportion of equity and debt. The nomenclature of products and funds varies across manufacturers. Many funds are benchmarked to Nifty, Sensex, BSE 100, BSE 200, Crisil Composite Bond Index, and so on.
In 2008, the insurance regulator, Irda, mandated that the accounting of all funds have to be maintained separately.
The quarterly disclosures provide information on asset under management (AUM), net asset value (NAV), historical returns and break-up of assets. Recently, Irda also ruled that insurers have to maintain separate bank accounts for each fund. Since September last year, allocation charges have been capped. Distributors, who approach the prospective customers with benefit illustrations and innovative comparative performance analysis, show how their funds are better than other competitors.
The matrix of products and funds are not easily understandable by the ordinary customer. How does the customer choose the right Ulip product and the best performing fund Ulips cannot be compared with mutual fund products, but, unfortunately, it has been pitched on return parameters in the market place.
The transparency of mutual fund schemes is accepted across investors. There are already research sites like Value Research and Morning Star that disseminate regular information on both risk and risk-return parameters. Similarly, Ulips can also be better understood and become acceptable by the customers if this information gap is bridged.
Ulips have a variety of charges, such as allocation charge, policy administration charge, fund management charge, mortality risk charge, guarantee charge (for guaranteed products), switching charge, revival charge, partial withdrawal charge, surrender charge, and so on. In July 2009, Irda capped the charges based on the difference between gross and net yields of any product.
For contracts of 10-year duration, the difference between the gross and net yields shall not exceed 300 basis points. For contracts above 10 years, it shall not exceed 225 basis points.
Customers are provided benefit illustrations with 6% and 10% indicative returns, along with details of charges. But they find it difficult to compare it with competing manufacturers products.
In case of mutual funds, there is no entry load, but there are management expenses of around 2.25% per annum. Further, there may or may not be an exit load, depending on the scheme. Recently a transaction charge has also been introduced.
Irda has ensured quarterly disclosures of AUM , NAV, historical return and assets composition. The monthly funds fact sheets contain information about these. But this is not standardised across manufacturers. Further, customers find it difficult to decipher the matrix of products and fund performance.
Ulips are long-term products and, in addition to returns, the customer needs to know the risk parameters as well. In case of mutual funds, risk parameters like Alpha, standard deviation, Beta, Sharp ratio and information ratio are publicly available. The availability of these information on Ulips will be helpful in selecting products matching with the risk appetite.
Customers need to know about the better performing Ulips. The manufacturers and the industry need to bring transparency on comparative charges, risk and return parameters, so that customers can evaluate the right product and the best fund suitable for them.
The writer is a certified financial planner at Max Secure Financial Planners