THE BIG STORY. Return of the ULIP

After a barrage of bad news over the years, investors in Unit-Linked Insurance Plans (ULIPs) finally have reason to cheer.

Before 2010, heavy costs and charges on these plans ate away large portions of the return. And with the markets stuck in a narrow range, investors didn’t get to pocket much by way of returns either.

But with the recovery in the equity markets, many of these schemes have sharply improved their performance in the last one year. With costs also capped through regulatory limits, a larger portion of this is going into their wallets.

While ULIPs’ performance was extremely difficult to gauge earlier, the regulatory limits on expenses and aggregated data from independent research agency Morningstar India have made it easier today to take stock of this asset class.

Here’s what ULIPs delivered.

Toppers and laggards Large-cap ULIPs delivered an average return of 35 per cent in the last one year, higher than the Nifty by 3 percentage points, shows data from Morningstar India.

Topping the list are funds from Bajaj Allianz Life, TATA AIA Life, IDBI Federal Life, Bharti AXA Life, HDFC Standard Life and ICICI Prudential (though not every scheme from these insurers did well).

Bajaj Allianz Life Insurance’s Growth Plus III has topped the one-year charts with returns of 66 per cent. That’s double the returns on the benchmark index CNX Nifty (return of 32 per cent in the same period).

The insurer’s other funds, Pure Stock, Equity Gain and Pure Equity, too, did well with returns of 49 per cent, 48.5 per cent and 46 per cent, respectively. IDBI Federal Life Equity Growth has given 44.5 per cent return.

TATA AIA Life Infrastructure (55 per cent) and Aviva Life Unit Linked PSU (46 per cent) have also given good returns. Regulations do not allow insurers to float sector funds and their exposure to a specific sector is capped at 15 per cent. So, even in their thematic funds, insurers restrict sector exposures to below 15 per cent in each sector.

HDFC Standard Life Growth Fund Investment Life, Bharti AXA Growth Opportunities Plus and ICICI Prudential Maximiser are others that have aced the large-cap category. All these funds have outperformed their respective benchmarks in the last one year.

The outperformance in most cases has been because fund managers went beyond the indices and picked up stocks in the BSE 200 or CNX 500 basket. Most of Bajaj Allianz’s funds did exactly this. The funds were first movers in taking exposure to cyclical stocks that weren’t a part of their benchmark index a year ago. That has paid off well in the rally.

For some funds, however, it was a combination of stock and sector selection that helped. ICICI Prudential Maximiser, one of the few funds with a 10-year track record that has clocked a 39 per cent return (benchmark - BSE 100) in the last one year, was helped by overweight positions on automobiles and private banks. Its picks in the metals space also worked in its favour.

In the mid- and small-cap category, ULIPs have delivered even higher returns.

While the category average return here is 68 per cent, IDBI Federal Life Mid Cap and Bajaj Allianz Accelerator Mid Cap have delivered 101 per cent and 75 per cent, respectively, in the last one year.

Stretching a little beyond the mid-cap space and taking some small-cap stocks along, these funds have managed large outperformance. The CNX Midcap index has delivered a return of 51 per cent in this period.

Go by track record The returns of ULIP funds in the last one year are alluring, no doubt. But, new investors should not go by just a one-year record. Search, instead, for funds that have been consistently outperforming benchmarks. Note that not many of the star performers discussed above have five-year track records.

For instance, Bajaj Allianz’s Growth Plus III is a very small fund with just a three-year record. TATA AIA Super Select Equity and IDBI Federal Mid Cap were launched only in 2010.

The ones with a longer track record are: Bajaj Allianz Life’s Pure Stock, Accelerator Mid Cap (Accelerator Mid Cap II is open for fresh investments; it follows a similar investment strategy as Accelerator Mid Cap); IDBI Federal Equity Growth; ICICI Prudential’s Maximiser (Maximiser V is available for fresh investments) and Bharti AXA’s Growth Opportunities (Growth Opportunities Plus is open). On a five-year timeframe, all these funds have consistently beaten benchmark returns.

ULIPs are investment products where you need to remain invested for the really long term of 15-20 years to get the best results. So, sector-focussed funds where fortunes are linked to business cycles are best avoided.

In the last one year, many funds that have concentrated exposure to infrastructure have done well, but it is doubtful if a similar performance will be repeated.

Take, for instance, TATA AIA Infrastructure. This fund has clocked a 55 per cent return in the last one year. Its three-year annualised return (five-year record not available) is only 9 per cent. Investors in this fund may check if their policy lets them switch to their diversified fund. TATA AIA Large Cap Equity has a track record of outperforming the benchmark index by 2-3 percentage points in the last five years.

Most ULIPs offer an option to switch funds. So, conduct a reassessment right away. If you are invested in these funds, switch to a fund with a longer good track record. Nowadays most insurers offer detailed portfolio information every month though it is not mandatory.

Sticking with MF peers? As ULIP investors you still will have to envy returns that mutual fund investors have made. A good 27 mutual fund schemes have given returns of over 45 per cent in the last one year. However, only nine ULIP funds have managed returns of over 45 per cent during this period.

Their category average return stands at 35 per cent, lower than the average returns of MFs at 37 per cent. Why the difference?

ULIP fund managers explain that they have restrictions on where they can invest the money. They are barred from investing in stock derivatives and there is a cap of 15 per cent on their exposure to a single sector.

Mutual funds are allowed derivative exposure but it is only for hedging purposes. Their sector cap, however, is at a much higher 25 per cent.

So, when sentiment is upbeat, mutual fund managers have the leeway to have up to a fourth of their funds invested in a particular sector and spice up returns. ULIP managers can’t do this. Also, quite a few ULIP fund managers are cautious about taking small-cap exposure. Their conservative approach limits return potential.

(Have something to say about Portfolio? Write to us at blportfolio@thehindu.co.in )

COMMENT NOW