Their costs are high and they aren’t as transparent as mutual funds. Those are the charges often levelled against unit- linked insurance plans, the popular market-linked products marketed by insurance companies. But Mr V. Srinivasan, CFO of Bharti Axa Life Insurance Co, counters these arguments with the defence that ULIPs are cost-effective if held for the long term, as they are meant to be. Excerpts from his lively chat with Busines s Line:

Investors in insurance products do not seem to have a clear idea of what their returns are. Further, the returns are not easily comparable between products. Portfolio holdings are not disclosed periodically. Mutual funds make all those disclosures. Isn’t that kind of disclosure necessary?

Investors are aware of the likely returns when they enter the product. When you buy a ULIP you are looking at exposure to a particular asset class say, equity, to meet a certain investment goal. On equity products, we have 25-year data on the Sensex that shows what stocks can deliver. We expect the investor to go by that data. If you are talking of an investor who wants to know the fund’s portfolio, its returns and its investment strategy on a daily basis, you are talking of an active investor. If you want to be actively involved in the management of your investment, then ULIPs may not be the product for you. The question is why would you want to know portfolio details and how your fund performs in a ULIP every day? However, some (insurance) companies do already have good portfolio disclosures and others will follow suit. I think that this is a matter of evolution.

Investors in mutual funds are used to pegging their returns to the published NAV. But ULIP returns to the investor are not based on the published NAV. Is that correct?

ULIP returns are based on the published NAV. But some of the expenses are adjusted in the number of units you hold. For instance, if you have 10,000 units at the beginning of the year, it will not remain at the same 10,000 at the end of the year. There may be deductions towards policy administration charges or mortality charges, which will reduce your unit balance. However, these deductions are known at the outset. You get details of these in your unit statement. You could easily get an idea of the near correct outstanding units at any time. Once you have an idea of the unit balance, you can arrive at the value by multiplying the NAV by the unit balance.

One of the key arguments cited against ULIPs is that the charges tend to be quite high, compared to mutual funds. Deducting 40 per cent of the investment towards expenses in the first three years is not unusual in a ULIP. Your comment?

Your contention is that charges are high. But you have to take into account the horizon with which you have invested in a ULIP. The design of a ULIP product is done with the long-term investor in mind. We are making sure our products are beneficial in the long-term through two means. One, we train our sales people and communicate with investors, saying that products are only to be looked at for 10 years or more. Two, we design our products so that investors stay with us for the long term. Let me tell you about our flagship product, Aspire Life. That product has a 100 per cent allocation charge in the first year. That is given back to the investor as a guaranteed addition at the end of the 15th, 20th or 25th year if an investor stays with us for the term – a sort of loyalty addition for investors who choose to stay. That product is quite popular and, in fact, many other insurers have copied that design. ULIPs make no economic sense if the investment horizon is for less than 10 years.

A long-term horizon becomes necessary for any investment product that invests in stocks. What does that have to do with design?

Mathematically, it can be proved that ULIPs recover their entire initial charges in the 7th or 8th year and thereafter begin to have a much lower expense structure than mutual funds. If you look at the maths of it, the crossover between a typical mutual fund product and a ULIP product happens at 7 years. It may be delayed to the 9th year or 10th year in some products. But nowhere will you find that the ULIP charges are more if an investor stays with the product for over 10 years. What is more, most insurance companies charge fund management fees at 1-1.5 per cent, while mutual funds could charge 2.5 per cent.

You are asking me to stick with a ULIP because, after a 7-year wait, the charges will be the same as that in a mutual fund. What if a ULIP fails to deliver the expected return and I want to switch my investments to another insurer who has a better performance record, before the 7 years are up?

There could be tax consequences to such switches, plus entry and exit charges. If you want to make a switch because you do not like the fund manager or the declared portfolio, you are talking of a very active and informed investor. I am talking of the mass or mass affluent investors here. As long as I am delivering to the benchmark, the investor need not worry about who the fund manager is or whether other funds are outperforming or underperforming. Even if you do want to switch, you can switch between the equity, debt or liquid option (in the same product) and redeem later. When you buy a ULIP, you buy a package. You get life cover, you get an option to choose between various asset classes. You also get an option to switch between asset classes (funds) during the life of the product. But if redeemed earlier than proposed, the ULIP would not be attractive.

Insurers already offer a gamut of asset allocation patterns. Where would you like to go from here, in terms of new products?

One product that we are seriously interested in, if regulations permit is capital guaranteed products. Insurers, we believe, are best suited to offer such products given that they are very well capitalised and have requirements such as solvency margins to back up any guarantees. To offer such products, we would like to be allowed to use derivatives. We are hoping regulators will allow us to use derivatives to offer capital guaranteed products.

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