Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of much discussion and debate. On the one hand, they were a trifle too complicated for individuals not yet exposed to the stock markets; on the other hand, they were much-maligned because of the ‘unusually high’ costs.

As ULIPs made their presence felt, insurers were more open to discussing the costs and how they evened out over the long term. This and the flexibility that ULIPs offer became important points that made individuals consider adding them to their portfolios.

Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility.

If you are between 25 and 35 years of age

You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child’s education/marriage to planning for your own retirement to providing for the family in your absence.

The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance — the cheapest way to get a life cover for yourself.

Term insurance is also insurance in its ‘purest’ form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan.

Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the ‘risk’ element, who is going to take care of the ’savings’ part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product.

So how can ULIPs help you save for child’s education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety.

Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don’t have traditional endowment, pension and child plans at all!

What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives.

If you are looking to set aside some money for your child’s education, the 5%-6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation, it should be enough to cover the cost of education.

And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role.

As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs.

You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child’s future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective.

Opt for a ULIP child plan to provide for your child’s higher education, marriage and seed capital for business to name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.

The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.

Again, a long-term investment objective like retirement planning could do with an equity ‘push’. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance.  

If you are between 35 and 45 years of age

By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP.

However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven’t insured yourself as yet, go for a term insurance plan.

The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one.

You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive.

If you are over 45 years of age

In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle, income, needs and financial commitments. Beef up your insurance cover through a term plan.

By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.

6 points to note

Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimise the benefits associated with them.

• Notice we have recommended ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.
• Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
• Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.
• ULIPs derive their ‘power to perform’ from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).
• Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.
• Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side.

The market regulator Securities and Exchange Board of India, SEBI, in January 2008 abolished entry load on Indian equity funds if you invest directly. However, it is mandatory to pay an entry load of 2.25 per cent if you transact through intermediaries also called as distributors by you and me. The distributors take this charge to service investors.

How is it levied on the investor?

Investor has to be careful and aware of how this charge is levied since nobody asks you to pay this charge separately. Instead it is deducted upfront from your investible money right at inception.

Suppose you are investing Rs 100 and NAV (the net asset value) of the scheme that you are buying is Rs 10. This NAV is multiplied by 1.0225 (2.25 per cent of Rs 10) to factor in the entry load and operative NAV for you becomes Rs 10.225 (Rs 10 as the actual NAV and Rs 0.225 as the entry load).

This takes the number of units allocated to you therefore to 9.78 and the money invested is Rs 97.8 instead of Rs 100. The remainder Rs 2.2 (100 less 97. goes to the distributor and to meet other administrative expenses incurred by the mutual fund company. However, if you invest directly through that mutual fund company’s website then full Rs 100 is invested and you hold 10 units.

Cascading effect of this cost

While you lose this money upfront, this charge literally multiplies. For example, even on a conservative basis, Indian equities can double in the next 5 years. Since 2.25 per cent has been deducted upfront and not been invested, what you have lost is 4.5 per cent (double of 2.25 per cent) from your returns.

Consequently it is a simple decision that you should invest directly and not pay this significant charge.

New favourable development

Abolition of this load is leading to emergence of fee based wealth management advisories in India. Money, which you save through direct investment — just a fraction of that could be utilised to buy the services of such an advisory.

They will facilitate your direct transactions in addition to host of other wealth management services.

Analysis of charges

On an average we are assuming that you are paying a rate of 0.4 per cent of assets under management (AUM) annual fee to your advisor. Since timing of cash outflows is different, we will have to take time value of money into consideration.

Paying 2.25 per cent of upfront commission is equivalent to paying 0.4 per cent of AUM every year for 13 years. In other words, what you are paying for 13 years, you lose in one single shot when somebody charges you 2.25 per cent upfront.

Additionally, a transaction based company which has tasted blood by getting an upfront commission of 2.25 per cent is likely to turn over your portfolio very soon and many times over even when not required.

On the contrary, a fee based advisor wins only when you win and their interests are totally aligned with yours. Even when he reallocates, it is at zero cost to yours and at no advantage to such an advisor and therefore it will be done only when really required.

Conclusion & recommendation

Consequently my strong recommendation will be to take full advantage of this gift and investor friendly move from SEBI, save lots of money and bolster your returns

(Source: Rediff.com/getahead/ )

n times when investors’ attention is hogged by market-linked avenues like mutual funds and ULIPs, small savings schemes have become a forgotten breed.

Alongside fixed deposits, small savings schemes (also referred to as post office schemes) would classify as the most conventional investment avenues.

Assured returns and a sovereign guarantee (read the highest degree of safety) are the hallmarks of small savings schemes. And these traits appeal to risk-averse investors in no small measure.

Even for risk-taking investors, holding a portion of their investment portfolios in assured return schemes is vital from an asset allocation perspective.

Small savings schemes, in turn, would classify as the most comprehensive pool of assured return schemes.

In this note, we study the investment proposition offered by five popular small savings schemes.

Public Provident Fund

Investments in Public Provident Fund are recurring in nature and run over a 15-yr period. Annual contributions are mandatory to keep the PPF account active. The minimum and maximum investment amounts are pegged at Rs 500 pa and Rs 70,000 pa respectively.

Only contributions of upto Rs 70,000 pa are eligible for tax benefits under Section 80C. Any amount invested over the aforementioned is returned without interest.

At present, PPF investments yield a return of 8.0% pa. However, it should be noted that the returns are assured but not fixed. This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.

Liquidity

With no provision for a regular interest payout, PPF fares rather poorly on the liquidity front. Withdrawals can be made only from the seventh financial year. Furthermore, the amount that can be withdrawn depends on the balance in the PPF account in the earlier years.

Taxation

Apart from Section 80C tax benefits on the amount invested, interest income from PPF investments is exempt from tax under Section 10(11) of the Income Tax Act.

Apt for…

Given that investments in PPF run over a 15-yr period and that annual contributions are mandatory, it is an ideal avenue to build a corpus for long-term needs like retirement and children’s education. It will appeal to investors who accord higher priority to returns over liquidity.

National Savings Certificate

Investing in National Savings Certificate (NSC) entails making a lump sum investment for a 6-Yr period. While the minimum investment amount is Rs 100, there is no upper limit. Presently, investments in NSC earn a return of 8.0 per cent pa, compounded on a half-yearly basis.

In other words, Rs 100 invested will grow to approximately Rs 160 on maturity. Unlike PPF, the rate of return in NSC is locked in while investing; as a result, the investments are indifferent to any subsequent change in rates.

Liquidity

NSC scores poorly on the liquidity front. Interest income is received on maturity. Also, premature withdrawals are permitted only in specific circumstances like death of the holder, forfeiture by the pledgee or under court?s order.

Taxation

Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. Furthermore, the interest accruing annually is deemed to be reinvested, hence it qualifies for deduction under Section 80C. However, the interest income is chargeable to tax.

Apt for…

Given its nature (lump sum investments), NSC is best suited for gainfully investing one-time surpluses and to provide for needs that will arise over a corresponding (6-yr) timeframe. It will be apt for investors seeking returns over liquidity.

Post Office Monthly Income Scheme

As the name suggests, Post Office Monthly Income Scheme (POMIS) generates a monthly income for investors. The minimum investment amount is Rs 1,500; conversely, the maximum amounts have been pegged at Rs 450,000 and Rs 900,000 in case of single and joint accounts respectively.

Investments in POMIS earn a return of 8.0 per cent pa and the investment timeframe is 6 years. On maturity, investors are eligible to receive a 5.0% bonus on the original sum invested.

Liquidity

With a monthly interest payout, POMIS fares better than all its peers on the liquidity front. Premature withdrawals are permitted after completion of 1 year from the date of making the investment.

If the premature withdrawal is made after 1 year but before 3 years, then 2.0 per cent of the initial amount invested is deducted as a penalty. Similarly, a premature withdrawal on or after 3 years, attracts a penalty of 1.0 per cent of the initial amount invested.

Taxation

Investments in POMIS are not eligible for any tax benefits. Also, the interest income is chargeable to tax.

Apt for…

POMIS is suited for investors like retirees and senior citizens who seek assured and regular income.

Post Office Time Deposits

Post Office Time Deposits are fixed deposits from the small savings segment. While investors can opt for 1-yr, 2-yr, 3-yr and 5-yr POTDs, only the 5-yr ones are eligible for tax benefits under Section 80C.

A 5-yr POTD earns a return of 7.5 per cent pa; the interest is calculated quarterly and paid annually. In other words, Rs 10,000 invested in a 5-Yr POTD will deliver an interest income of approximately Rs 771 pa. The minimum investment amount is Rs 200, while there is no upper limit.

Liquidity

POTDs fare favourably on the liquidity front, thanks to the annual interest payouts. Premature withdrawals are permitted after 6 months from the date of deposit; however, the same entails bearing a penalty in the form of loss of interest. Finally, any excess interest paid is recovered from the principal amount and the interest payable.

Taxation

Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. The interest income is chargeable to tax.

Apt for…

The 5-yr POTD can be utilised for generating an annual and risk-free income, alongside making a tax-saving investment.

Senior Citizens Savings Scheme

Unlike the other avenues that we have discussed so far, Senior Citizens Savings Scheme (SCSS) is open only to a section of the investor community i.e. senior citizens.

Individuals who are 60 years of age and above can invest in the scheme; those who have attained 55 years of age and have retired under a voluntary retirement scheme can also participate in the scheme, subject to certain conditions being fulfilled.

The minimum and maximum investment amounts are Rs 1,000 and Rs 1,500,000 respectively. Investments in SCSS run over a 5-yr period and earn a return of 9.0% pa.

Liquidity

Given that SCSS is targeted at senior citizens, the liquidity aspect has been adequately addressed; interest payouts are made on a quarterly basis i.e. on March 31, June 30, September 30 and December 31, every year.

Premature withdrawals are permitted after the expiry of 1 year from the date of opening of the account. In case of withdrawals made after 1 year but before the completion of 2 years, an amount equal to 1.5 per cent of the initial amount invested is deducted. In case of withdrawals made on or after the expiry of 2 years, an amount equal to 1.0% of the initial amount is deducted.

Taxation

Investments in SCSS are eligible for tax benefits under Section 80C. The interest income is chargeable to tax and subject to tax deduction at source as well. Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.

Apt for…

Expectedly, SCSS is meant for senior citizens who wish to receive an assured income at regular time intervals. The tax benefits only add to the allure of the scheme.