ULIPs Review- Unpredictable Future with the New Mandatory investment
The proposal of ULIPs 25% investment as mandatory in the g-sec, the government securities has actually disheartened many. ULIP funds are actually the insurance products that are market linked, wherein a certain portion of this premium is invested in the policyholder’s choice of funds. Till date, a minimum investment of 80% was permitted in equities. Nevertheless, if accepted, the current proposal will alter the dynamics such that the investors will have limited choices and have to stay contented with the lower returns. The key aim behind such a proposal may be long term projects noble financing, but certainly the consequences or implications it may face not be appreciable.
ULIPs were invigorated after the regulatory changes of 2010 and it turned the product to be more investor-friendly. The turnaround was remarkable as it was seen as the low-cost investment product that it did not overcharge investors. This allowed the investors to merge their investments at a low premium with insurance. Of course, the tax benefits were availed by the investor under Section 80C. Now ULIPs again are expected to be renewed.
The investors effect on the ULIP changes
The new ULIP proposal is sure to whittle down the choices now available as a policyholder. In fact, many who consider pure equity funds may henceforth show no interest in pursuing investment with ULIP. The recommendation proposed will compel investors into products that are hardly generating returns less than 8%. The government securities exposure may offer the cushion, if the equity market is slow. However, in a rising market scenario, equity exposure to 100% may help in generating good returns.
The new proposal affect on the investment instrument ULIP
ULIPs have been going through a jerky track record. The unsteadiness was apparent and only recently it has gained speed in the investors mind to approach it. But if this new proposal or recommendation is accepted and falls into effect, certainly, the sale of ULIP will be a hit. The main aim of the proposal is to control the investment in equity funds that offers highest returns in all asset classes. Going ahead with the government securities even with minimum investment is sure to lower the investor returns from funds, thus it will turn to be the least liked insurance product.
As a ULIPs part, insurance companies provide four fund options namely, debt, secured, balanced and equity funds. But, if each fund needs to comply with the 25% mandated investment in the government securities, it is going to bring a situation where equity funds will not exist. As a result, investors will be found dissuading from investing in ULIPs and insurers will have a tough time even in selling the product to investors looking for equity exposure to 100%.
At present, insurance companies endow in approved securities, and his investment includes ‘AA’ bonds and higher bonds secured by assets. Taking into concern the equity side, ULIPs may invest in companies showing 4%-5% dividend paying record for at least nine years. Mandating 25% to government securities is sure to limit the available investment options.
The proposal of IRDAI is drafted keeping in mind the governments interests and not the interests of the consumer. The 25% mandatory investment in government securities restricts the risk factor, but this includes other repercussions because many policyholders are ready for pure risk cover and such investors may not find it attractive anymore.
In case, policyholders in majority wish to invest in equity funds, the fund managers may be unable to comply with their wishes. This means, this new proposal of the ULIP will push people from investing in ULIPs towards the investments offering higher returns or pure equity fund option. Ideally, a customer must be allowed to make a choice of investment in funds, such that this is a practice followed in the world. Compelling companies to invest money in securities types is not a favorable idea. Especially, with traditional plans offering guaranteed return option, the need to have an investment clause separately for 25% is not necessary.
The government can develop finance with long term projects by directly approaching the people by listing on the stock exchange government bonds. This move will also garner cheers as the investors will stay in control of the money and will love to invest, besides, ULIPs will continue its attraction and will be undisturbed.