India Insurance: ULIP

Unit Linked Insurance Policies (ULIPs) are insurance policies that combine risk coverage with investing in the stock/debt markets. In effect, they are designed to behave as normal insurance policies plus mutual funds.

An investor contribution to ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically pays back based on market returns on investments at the end of the insured period. Therefore, it forms an interesting savings instrument that can get good risk cover.

Features of ULIPs include:

1. Units allotted under ULIP schemes have Net Asset Values (NAV) declared regularly, like a mutual fund

2. Investors can invest across types of portfolios similar to mutual funds - growth equity, balanced, debt funds, etc. Investors can move across portfolios, typically at nominal costs

3. Investors can invest as a lump sum (single premium) or make premium payments on an annual, half-yearly, quarterly or monthly basis. Premium amounts can be changed over the course of ULIP's life

4. Investments qualify under Section 80C of the Income Tax Act. Maturity proceeds from ULIPs are tax free. There are no long term capital gains tax and 10% short term capital gains tax on equity portfolios within ULIP. For debt funds, long term capital gains tax is 10% while short term is at the investor's marginal tax rate.

5. However, charges charged by insurance companies can be quite confusing - therefore, investors should compare them with similar mutual funds to see if charges quoted are reasonable.

Despite their interesting structure and potential benefits, investors are better off clearly understanding portfolio types offered, performance of fund managers and expenses/fees before investing in ULIPs.

India Sensex volatility - mutual funds vs fii

India mutual fund companies and foreign institutional investors (FII) appear to have been betting in opposite directions for most of the recent Sensex growth.

ETIG data highlights this trend:

• When Sensex jumped from 14,000 to 15,000, FII sold shares (net sales) worth 2372.10 crores while Indian mutual fund companies bought shares worth Rs 2891 crores
• Between 15000 and 16000, FII bought shares worth Rs 7307 crores while Indian mutual funds bought only Rs 667 crores
• When Sensex moved from 16000 to 18000, FII bought shares worth Rs 24,372.3 crores while mutual fund companies sold (net sales) Rs 2182.21 crores
• Between 18000 and 19000, FII bought Rs 7378.2 crores worth shares while mutual funds sold (net sales) Rs 966.2 crores worth of shares
• Finally, when Sensex jumped from 19000 to 20000, FII sold (net sales) Rs 1281.1 crores worth of shares while Indian mutual funds bought shares worth Rs 1515 crores.

Question arises as to why two groups of well researched/informed institutional investors have bet on opposite sides in a stock market that has grown to dizzying heights in a matter of months.

It appears, that mutual funds companies in India expected a correction in Sensex when the US sub-prime crisis hit in August - therefore they preferred to lower exposure. While some market commentators expected FII money running away from the US sub-prime mess to come to emerging markets, the relative deluge in to India surprised many a mutual fund pundit ! Domestic mutual funds, who were cashed up, now appear to want to get into the market so as to meet performance hurdles. Interestingly, FII money in the latest run up, seems to be going the other way.

All said and done, while an investor may be able to make some money purely playing momentum, longer term players would be better off considering fundamentals of the company closely while trying to leverage momentum plays. However, if leading institutional investors see fundamentals of blue chips in India so differently, what chance does a retail investor have ?

Mutual funds missing in Indian investor's account !

India related investments and savings sometimes throw up unusual challenges. A mutual fund investor in India learnt an important lesson the hard way.

Mid Day Mumbai describes the case of a lady in Mumbai who invested money in State Bank of India (SBI)'s mutual funds through her broker in July 2007. In October, she called up the help line number to check her balance and was shocked to learn that the invested amount was not reflecting in her name. Further investigation revealed that the broker had set up the account in his own name and had issued her a fake statement confirming deposit of the money. She confronted her broker and the money was duly refunded. A case of fraud has been filed against the broker.

This case highlights the ease with which your money can go walk about unless carefully monitored. An Indian investor is better off watching his/her investments closely to ensure all the hard earned money is put to work at the earliest.