A substantial chunk of equity unit-linked insurance plans (ULIPs) belonging to large-cap, mid-cap and multi-cap categories have failed to match benchmark returns in 3-, 5- and 10-year investment horizons. This highlights the ongoing challenge faced by investment managers, including those in the mutual fund space, and adds to the ongoing actively managed versus passively managed debate that is raging the investment world.
The analysis was done by comparing ULIP funds’ performance from Morningstar and total return index return data as on April 18, 2023. The study covers 118 ULIP funds (50 each in large-cap and multi-cap and 18 from mid-cap) across 20 life insurance companies including ICICI Pru, HDFC Standard, Bajaj Allianz, Tata AIA etc.
ULIP products typically combine market-linked investments with a dash of insurance, and are marketed as suitable for long-term investments courtesy a 5-year lock-in.
Actively managed investment portfolios cost more than simply copying a passively managed basket of stocks, and hence are expected to outperform indices.
Extent of under-performance
While in the three-year period, 38 per cent of 50 large-cap ULIPs underperformed Nifty 100’s 24.1 per cent CAGR return, the extent of underperformance grew for such ULIPs in five-year (49 per cent) when Nifty 100 clocked 11.2 per cent CAGR and 10-year period (77 per cent) when the benchmark posted 13.3 per cent CAGR.
Mid-cap ULIP funds have been consistent in underperformance i.e., over 80 per cent of studied 18 funds failed to beat Nifty Midcap 150 across three-, five- and 10-year periods. This is because barely 1-3 funds out of mid-cap ULIP universe were able to match the index’s 34.3 per cent, 12.2 per cent and 18.6 per cent CAGR gains in the respective time horizons.
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If large-cap ULIPs underperformance deteriorated as the time horizon increased, the opposite was true for the 50 multi-cap ULIP funds studied. In this bucket, underperformance was highest (94 per cent) in the three-year period as the offerings found it tough to beat Nifty 500 Multicap 50:25:25 index’s 30 per cent CAGR returns.
In five-year period, a lower share i.e., 71 per cent of multi-cap ULIPs failed to match the benchmark and in the 10-year horizon, just 58 per cent underperformed.
A head-to-head comparison of equity ULIP funds with equity mutual funds of the same categories may not be apple-to-apple. One, MF regulator SEBI has put out strict definitions of categories which make them more true-to-label with less leeway. Two, fees and charges in case of ULIP funds mean that investor return could be lower than fund return.
This does not happen in mutual funds as costs borne by investors are put in total expense ratio (TER) and the daily NAV of a mutual fund is disclosed after deducting the expenses.