I am finally back from vacation , I feel bad for not writing anything for these 11 days .. I have written a post on GOLD Breakout here , People interested in investing in GOLD may be interested . Let me talk about IRR and ULIPS today . When we see talk about Ulips , people generally see its returns over some years , where as its not the true indicator for its actual returns , What we need to see is called IRR .
What is IRR ?
Actually IRR is not only related to ULIPS , its a general concept . IRR is Internal rate of Return , It means returns after adjusting all the costs and expenses .IRR alone is not a single thing we should look at , Its calculated by assuming fixed rate of return like 6 or 10% . The other things to look are its actual performance too .
What are good ULIPS in markets currently ?
Some weeks back there are was a survey and study by outlook money on best Ulips , Birla Sun Life’s ClassicLife Premier and Kotak Life’s , Long Life Wealth Plus were some top funds compared on the basis of IRR . this article talks about the best ULIPS in detail , click on this to read more .
Full article related to ULIPS can be read here
Understand , Choosing a good ULIP is just 5-10% , the main part is how your manage it . how to take care of the advantages provided by ULIP, If you just want to buy a ULIP and sleep for 10 yrs , ULIPS is not for you then . you must buy Mutual funds Instead .
Manging a ULIP is the main part , If you manage a bad ULIP very well , you can earn good returns, but you can loose money by buying Best Ulip in markets and mismanaging it .
How to manage a ULIP ?
Managing a ULIP over a long term is very simple but not easy . You have to do some simple things . Always use switch facility when you anticipate the opportunity . When you see markets are very high and there is lot of euphoria in market , Decrease your Equity allocation and shift it to Debt . And when you see dull ness in market and everybody is too afraid in markets its the time to shift your money in Equity .
How to make sure that this is done easily ?
You should find out your Equity : Debt allocation ratio which suits you , which is comfortable for your risk appetite . Once you choose it . Make sure you maintain it once it goes out of sync . So suppose you decide that your Equity:Debt ratio will always be 75:25 . and suppose after an year , you see that it has changed to 65:35 . You should shift some of your Debt part to Equity and bring it back to 75:25 .
You can read how Equity Debt rebalancing helps in long term
This way you will make sure that if Equity has gone up (because if good market performance) , you are shifting some money back to Debt (because now chances to correction is high) and vice versa .
The main advantage of ULIPS is the you can shift between Equity and Debt without any tax liabilities , If you buy Mutual funds and do it , you will pay tax every time you buy and sell it in short time frame (1 yrs) . So until you utilize Switch facility well enough in ULIPS , you are not taking best advantage from your ULIPS .
So as a general rule :
- Increase your Debt allocation once markets are too high and every body is rushing to buy shares in stock markets .
- Increase your Equity allocation after markets are down a lot and there is lot of fear among investors (this is a good time to buy cheap stocks).
- Increase your Debt if you are too confused about what will happen .
Final Note :
If you cant invest for more than 10 yrs and cant look after switch facility and cant monitor markets at broad level , You should stay away from ULIPS, the best thing for you would be to invest in PPF each year and invest in Equity Diversified Mutual funds through SIP every month and review it at least once a year .
Please dont buy ULIPS for just tax savings , dont get out of it in 3-5 yrs . there is 3 yrs locking , but even if you get out in 4th or 5th year , there are heavy penalties you have to pay to get out , which your agent never tells you , Only after 5th year there are free exits .
ULIPS are not bad products , they are only bad if you dont manage it well and buy them for wrong reasons .
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{ 50 comments… read them below or add one }
Manish,
the biggest benefit of IRR is that it incorporates time factor (in addition to expenses).
Plus IRR is good only for “fixed” time based regular input/outputs.
For “irregular” time based inputs or outputs XIRR is a better measure.
@income.portfolio
Thanks for the information . I didnt know about this . Can you please put more info about XIRR ?
From the Excel Help:
Returns the internal rate of return for a schedule of cash flows that is not necessarily periodic. To calculate the internal rate of return for a series of periodic cash flows, use the IRR function.
XIRR is closely related to XNPV, the net present value function. The rate of return calculated by XIRR is the interest rate corresponding to XNPV = 0.
@Anonymous
Thanks for the information , but still its too high level and I dont understand the meaning for it , Can you put it in simple wrods .
Manish
Well, there're explanations on the web – see How to Calculate Returns on Investments – scroll down for the example.
Thanks Manish, I realized this just yesterday – when I calculated the parameters and checked the current valuation of my ULIP. I have completed 2 years in the ULIP, now I am confused whether is it better to exit after 3.5 years [using Top Up, to ensure that there is no charge for surrender value] or whether it is wise to manage it until end [i.e., 10 years].
Manish, Gud presentation by u for ulips product, ur correct there is so many charges thats r not revealed by the advisor but now IDBIFORTIS LIFEINSURANCE AND KOTAK LIFE INSURANCE both r having a gud fund name Aggressive Asset Allocation fund in IDBI and Dynamic floor fund in KOTAK it will switches automatically depend upon the market.
@NKanani
Well .. it would be great to exit , if you dont understand the product. Its like marriage .. do you want to compromise with some one who you dont even understand and cant enjoy with or would you like to divorce and look for other opportunity ..
As its said .. If Chemistry is missing , Arithmatic will never work
@aalawanthar
Personally I had nothing personal with ULIPS , Its mostly agents and the people who mis-sell to people without understanding their needs. If you give ULIP to me .. I can beat Mutual funds by hugh margin , because I have interest , knowledge of markets and time for that .
Its not true for everyone and thats totally fine :0
Manish
Manish
1 year back i had taken HDFC unit linked endowment plus2 plan.It is having different fund options(balanced,defensive,equity,growth). My fund option was 100 % equity fund(60% – 90% in equity + 10- 40% in debt).
With the help of Switch option how i can maintain the equity as 80% and debt as 20%?
Rayadu
The fund options will have their own predefined ratios in equity or debt , for this customised ratio you might have to talk to your fund .
Manish
I had bought a ICICI Prudential ULIP. I have paid 3 premiums, so am done with the lock-in period. I plan to stop further premiums and invest the same amount as SIP. When I contacted the ICICI customer care, I got to know that there is an option of stopping the premium but the insurance coverage continues for which the mortality charges get deducted from the existing units. Is it worthy to go for the continuance of the insurance coverage or stop the ULIP.
you could have stopped the premium any time you wanted , even before 3 yrs . Not an issue . Its accepted . 3 yrs lock in period just says that your money will be locked for atleast 3 yrs . thats all .
So now the question of continuing it . So the thing is how well are you managing it ? Are you using switch facility efficiently , Do you have the expertise ? Do you want more than 15% over long term ? If answers to all these are no ! . then it does not makes much sense to continue .. you will do better in Mutual funds then , given you consistenly invest and do your portfolio rebalancing once in a year or two year .
Manish
Thanks Manish for the quick response.
anytime
Hi Manish,
I had taken a LIC ULIS scheme in 2006 by paying 20,000 . I further paid a sum of 20,000 in the year 2007.. Since my locking period was of 3 years .. I opted for the refund of the entire units and amounts …Instead of getting the total principal and bonus (around 40,000+) I only got about 20,000. The logic given was that its a part payment and the money which was being locked since 2006 is given to me in 2009 and the amount paid in 2007 would be provided only next year 2010 . Is this true that for every installment paid the locking period is 3 years… I think all this belong to one single policy or account and as such the locking period should apply from the start of the account till 3 years….
Please help and suggest
Thanks
Karthik
If its a ULIP . then its not true .
In ulips the lockin period is 3 yrs from the start of first premium . Check your policy document . thats the source of truth . dont list to agent or any official .
manish
hi ,
I suresh planing to take ulips, So can u tell me abt the ulips,and in ulips which shall i take ,i ahve read article but i confused abt the ulips .. so please suggest me what to take in ulips like only equity ,or only debit,or both equity+debit.. which one is useful and how to mange that for long term.
And also when i take the ulips which website is good to see abt the markets so that i can make any correction at that time..
plz tell me and i am kindly waiting for u reply
Suresh
Suresh
ULIP’s are complicated products and have high costs associated with it . So its better you dont take it unless you understand how to manage it well .
Manish
Hi Manish,
Really grateful for the information provided.
I am very late, only after getting some info from my friend recently, i began searching internet for saving my money invested in ULIPs.
I have taken ICICI Prudential Life Time Super Pension ULIP Policy on 12/07/2007, paying 834 Rs monthly (yearly 10000). The fund name is Flexi Growth, 100%. (Flexi growth has high risk and high returns)
Another from HDFC Standard life, Policy name: UNIT LINKED YOUNG STAR, taken on 11/09/07, monthly premium 1500 Rs. The fund name is Defensive Managed Fund.
I want my money to grow not diminish. only after 5 years the surrender value is 100%. After 3rd year its 96%, 4th year 98%. for ICICI.
For HDFC i don’t know the surrender value
Till now i haven’t made any switches among different funds. just paid premium and kept quiet. I don’t know anything about switching funds, and knowledge about market, but i am willing to learn.
My question is should i stay in this ULIP or should opt out. I don’t want any scheme just protection of my money, And low risk investment.
If i have to opt out how much money will i lose.
I request your advice here.
Thank You
Jagmint
You have got into unsuitable products in that case
. ULIPs are advanced products and you need knowledge of switching , market movement etc to make best use of those ULIP’s else you are better buying plain mutual funds and term insurance which i would prefer for anyone .
Read : http://www.jagoinvestor.com/2009/11/what-happens-if-you-stop-your-ulips-before-3-years.html
Its not the matter of “ready to learn” . Even I am ready to learn a lot of things in life, that does not mean i have to study them , there is an option of not learning it and not taking care of it. you should have good interest in some field also .
manish
manish,
Recently I heared about LIC Wealth Plus policy, the premium should be paid for only 3 years, and after that they will be giving the returns on highest NAV till maturity. Will this policy be beneficial?
I am a regular reader of your blog, and came to know that ULIPs are not the best pick, but when I came to know about this policy, and the hype of policy, I couldnot resist myself from asking the Qs.
Amol
Highest NAV thing is another thing which is mis sold most of the times, I am not sure of LIC policy but you can read this one : http://www.indianexpress.com/news/no-free-lunches-in-financial-markets/568433/0
Manish
I made mistake by buying ULIP from Bajaj alliance ,the policy name is Capital Unit Gain. I have already completed 3 year payment and the next due date is around the corner.
I choose bond and liquid in 80-20 ratio and no equity . The term of policy is 49 years and sum assured is 6.25 lakh.
Now i have some idea about this switching in ulips and market movement as i am following your blog and markets for about 6 months now.
My question is,I am fine with continuing the 25K yearly premium. I checked with bajaj and they confirmed that the surrender value is linked to term of policy and currently it will be 56%.
Is it worth continuing as surrender even after 15 years will be high, as its linked to term of policy which is 49 years.
Is there any way to get profit out of this ULIP?
Prabeesh
First thing you should check with Bajaj is how are they going to restructure the ULIP as per new mandate from IRDA . I am not sure if it will help you much as you have already paid much of the commissions
. but still ask them
One thing which must be stopping you from getting out of this is “losses” you are making . Just think for a moment , does continuing this policy and getting bad returns because you cant handle is not equally bad and in a way you are loosing your money , Getting 44% absolute loss right now is much better than paying premium for 20 yrs and then getting very bad returns which you could have made some other way ..
Manish
“If you just want to buy a ULIP and sleep for 10 yrs , ULIPS is not for you..”
i agree, but i have a question based on my real personal experience with ULIP. In may 2008 i bought Aviva LifeBond5 and invested 100% in Index Fund. in only my first policy year (may 2009) i got 21% return (after deducting premium allocation + policy administration + mortality + fund management charges) on my actual investment minus all these charges. And i didn’t performed any switch option (4 free per policy year). i just paid quarterly premiums and sat back.
please explain how it is possible when you says ulips only effective when performed switch option.
Another my question is:
they say Equity is beneficial only for long term, in other words eventually stock market goes up over any span of time.
my question is “if i stay invested in Index fund for my next 10 policy years and do not switch on all 10 years, shouldn’t i get high returns?” as the stock market will go way too up by 2018.
smithjohn
The reason you got 21% return is because the market performed very well and even after deducting all the charges and all you got good return , but ask what would have been return if you didnt invest in ULIP and actually invested in some Equity MF or pure index fundf, it would have been much much more than 21% , may be 50%+ .
So what happened in your case is a specific case, if you dont utilize the switch facility than the result would be same as mutual funds ,infact less than that because then you pay higher charges also . Are you understanding ? doubts ?
Manish
manish ji,
plz tell me that ULIP is gud 4 investment cum insurance … i want 2 do insurance .. plz suggest me what i have do .?
which company & product ?
right now my age is 22 ..
Ronak
Go through ULIP and Insurance articles on this blog and you will get good idea of what to do
.
In short get a term insurance and buy MF
Call me Manish .
Manish
it was a good explanation given
Hayat
Thanks
i”m submit 1500rs quaterly in a LIC and after 3 year it is mature and now i don”t know how to get money back . the agent from which i take this policy is died now tell me what can i do now plzzz
Is your policy maturing after 3 yrs ? or do you want to surrender it after 3 yrs, its not clear . Contact an LIC office to find out what you have to do for this .
Manish
Dear Sir,
I like to invest in lic ulip plan market plus 1 pls tell me can i take this police
Pravin
better read more on ULIP;s , Its not suitable for general investor .
Manish
Hi Manish,
Can u update us regarding the new ulip policy terms and some new ulip plans for wealth creation in long terms.
Thanks………..
Sanoj
yes , will do that soon
Manish
Today, is the first time I have entered to your web site, and I already 3 articles.
Atleast now I know that my policy can be managed.:) . One info I would like to know, As per DTC ULIPS are exempt from 80C. So, what would be the status of a policy taken a year back (I mean suppose last year I took a policy just for 80C and now I cant discontinue and not even claim on 80C)
It is worth going through this site for any commoner. Good Post. If I would have come across this some 4 years back, i wouldnt have taken a ULIP.
Vishnu
Thanks , good to know that you are liking the website and what you learn from it .
ULIPs are still under DTC , just that the limit would be 50k .
Manish
Hi,
Thanks for the valuable information about ULIP.
I am having ICICI Life time Super Pension ULIP(without insurance option). I have completed my 3 years period. Now is the due for the 4th annual premium.
My question here are,
Is it possible to pay the premium halfyearly or quartely from 4th year. .?
Is it possible to pay partial amount as we like instead of full premium from 4th year onwards..?
Is top up possible at any point of time or only along with the premium..?
Nava
These are all product specific questions , your policy documents will have all this info . Did you have a look in it ?
Manish
Thanks for your reply.
At present I am a NRI, documents are in home.
I will go through it while I visit Inida.
Thanks,
Thanks for your advise to use switch option.
I am going to follow the below mentioned strategy for switching the fund between equity & debt. Please review and advise.
1) If the Nifty is above 50EMA then I am going to have the equity:debt ratio as 90:10.
2) If the Nifty is below 50EMA and above 200EMA then I am going to have the equity:debt ratio as 50:50.
3) If the Nifty is below 200EMA then I am going to have the equity:debt ratio as 10:90.
Regards,
Nava,
Nava
Have you tested this on past data ?
Manish
sure
Hi,
Thanks for your quick reply. I have not tested it. But visually looked into the chart for the past few years.
I will check it with the actual data and let you know the result.
Is it Ok to check with past three years data..?
If you have anyother simple strategy to decide the switching criteria..could you pl. share..?
I will be usefull to compare the results with my planned strategy..
Nava
Yes 3 yrs looks good as it has ups and downs both . Use PE nifty as a measure to switch, you can see the post on nifty PE for this .
Hello Manish,
I read out all your given information related to ULIP product’s,It’s a really very good and very help full to new investor who doesn’t know about Market.
Manish
Thanks
. Keep reading and spreading your knowledge to others
really very very good article. very well written indeed.
I seriously got to know about ULIPS now.
Finally, I would like to know that if I want to get my money invested in safest fund as well as i cant check out the status of the market again n again as you already said, which would be the best fund.
I read about funds and considering for “bond fund” to switch in.
please guide.
Abhinav
In that case better invest in an INDEX FUND .
Manish