Ignore this and lose 99% of your insured policy value - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Ignore this and lose 99% of your insured policy value 

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In this issue:
» Will NDA's steps to curb food prices materialize?
» This is why oil prices are rising...
» Are Indian firms being overly optimistic now?
» Fed to raise rates sooner than consensus expectations
» ...and more!

We have always been vocal about our dislike for Unit Linked Insurance Plans (ULIPs) that were in rage in the insurance industry till about few years back. Being bundled in nature, ULIPs combine both insurance and investment needs under a single roof. This poses a risk to investors as ideally both these needs should be viewed in isolation.

However, the bigger risk is the ill conceived structure of the product. It contains a host of charges that are very well camouflaged. Most investment advisors choose to stay muted when it comes to making the requisite disclosures for the want of higher commissions attached to such products and thereby take investors for a ride.

In fact, we came across one such instance in a news daily recently. As it generally happens, a senior citizen in this case was sold one ULIP plan which after 5 years resulted in a loss of 99.5%! Yes, you read it right. This gentleman lost his entire capital by buying insurance cum investment plan which is perceived to preserve investor's capital and provide insurance benefit.

Not only did the exorbitant cost heads ate into his returns you would be surprised to note that the fund's NAV grew at a paltry rate of 2% over the stated 5 year term! And this happened right under the eyes of IRDA which is supposed to regulate the industry and protect policyholders' interests.

While we shall ponder more over IRDA's inefficacy in this matter later the basic question is why such instances happen so frequently. And why do most investors fall prey to gimmicks of investment advisors?

There are multiple reasons for it. For one, such products are mostly being sold via banking channels. So, if you are a customer of a particular bank for years you obviously develop some trust with it. Hence, when an advisor tries to sell you a product via bancassurance, you listen in good faith. And fall prey to them easily.

Also, although investors agree that it's important to diversify their portfolio they don't always take this advice to heart. When they see an option that seems to offer the benefits of diversification, without the efforts, they go for it.

Not to mention that hidden charges for such products are not revealed during the initial pitch. And the return assumptions are optimistic. Further, since you sign all the documents, it is deemed you are in the know of the terms and conditions. Then in case of dispute, the insuring company uses that document which you signed as an escapist measure. And there is very little you can do in such cases.

This takes us to questioning the role of IRDA in such matters. Being a regulatory authority it is the responsibility of IRDA to see to it that interests of policy holders are not compromised and such products do not make it to the market. Just giving a disclaimer about the characteristics of the product is not the solution. Such structures should be critically evaluated at the inception stage itself. And if a sense of clarity does not prevail, they should be junked.

We fail to understand how such structures have made it to the market under the vigil of IRDA. Either IRDA was confident about the nature of the product and its success or it was simply ignorant. While no one knows the truth, the fact is that naive investors have suffered because of such a poor decision making. Seems that IRDA needs to pull up its socks and redesign the market micro structure that is more investor friendly.

Have you ever been mis-sold ULIPs? If yes, what did you learn from the experience? Let us know in the Equitymaster Club or share your comments below.

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01:45  Chart of the day
Now that we have talked about IRDA's efficacy, let's see what the BSE stock exchange is upto in terms of improving the efficacy in trading and reducing speculation.

The sharp momentum in mid-cap and small-cap stocks in the recent past had given rise to speculative trades. These made the traders go berserk. At such times the interests of genuine investors go for a toss. Therefore, the regulator has decided to interfere in order to curb such reckless trading activities. To that effect, the BSE has shifted many mid and small-cap stocks to the "T" group. Now what's a T group? It is a trade-to-trade segment comprising of shares which have to be settled in delivery. This implies that investors and traders have to mandatorily take delivery of these stocks. This is part of a surveillance exercise from the BSE to monitor any unwarranted movements in the share prices. No wonder the inclusions in this segment have gone up since 2010.

As can be seen from the chart, the number of stocks in T-group has more than doubled from 450 in 2010 to 1,101 in 2014. Such regulatory surveillance stands imminent especially during euphoric bull-runs. That's because sporadic movements in stocks lead to unprecedented speculative actions. This in turn can give rise to systemic risks. So while the regulator is sanguine about the ramifications, investors too should exercise caution while investing into equities.

Is this the best way to curb speculation?

We believe that every asset class has two components in its price. The basic fundamental component and the speculative component. The speculative component has perhaps gone up in Indian stocks in recent times as the thing that is driving prices is mainly the expectations of better earnings going forward. Similarly, the increase in speculative component of crude oil prices is causing jitters around the world these days. CNN reports that the 4% spike in crude prices since June 6 is mainly because of fears that exports from Iraq could be hit this year just as world demand is about to pick up. To be fair, the fears cannot be dismissed lightly. Iraq happens to be the second largest oil producer in OPEC and any disruption here could certainly hit supply hard. So far it is Saudi Arabia and the US that have picked up the slack from whatever slight disruption has been there. But when demand accelerates this coming winter, there is a chance of oil prices inching northwards. More so if more troubles come to the fore in Iraq. India for one would be watching this development closely as already inflation is proving to be a difficult monster to tame.

Food inflation has been a huge problem for India for quite some time now. It has been the primary reason for the spike in overall inflation in the country as a result of which the RBI has been reluctant to cut rates even when growth has slowed. So it is hardly surprising that reducing food prices has been one of the top priorities of the Modi government. And in this regard, a few steps have been announced as to how the government intends to resolve this problem.

As per an article in the Business Standard, first, the government plans to impose a minimum export price (MEP) to bring down prices of commodities such as onions and potatoes. These essential items had witnessed a price surge in recent times on account of hoarding and black marketing. The rationale behind the MEP is to restrict exports so that there is ample domestic supply. The other step that the government intends to take is to delist fruits and vegetables from the Agricultural Produce Market Committee (APMC). This would mean that farmers now will have an option to sell their produce either to the APMC or in the open market. Offloading more food such as rice in the open market is also being explored by the government. While these measures could help cool food prices, we are not sure whether these will work from a longer term horizon. For that, besides keeping a check on hoarding, the government will need to ramp up infrastructure such as storage and warehouse facilities. This will ensure that food during a good harvest season can be stored well without any rot or wastage. This will particularly insulate the country during drought years when food production is poor.

The change of government at the Centre has not only sent the Indian stock markets soaring. In fact, even business confidence has seen a substantial revival. In a recent poll of 124 Asian companies, it turned out that Indian companies were the most optimistic. All the 10 Indian companies reported a positive outlook. Most companies witnessed improvement in new orders, sales and employment levels.

While these are indeed positive signs, we believe it would be a bit risky to pin very high expectations on the new government. As we have mentioned time and again, there are several risks luring in the global economy that could destabilize a potential recovery in the Indian economy. The crisis in Iraq has caused oil prices to shoot up. Inflation levels in India are already high and could be further aggravated if oil supply is curtailed by the crisis. The Indian rupee, too, has been quite volatile.

All in all, investors must take the optimism of Indian companies with a pinch of salt and invest in fundamentally sound companies that would be resilient to adverse external shocks.

Speculations have been rife that this time around the Fed may resort to actual rate hikes. Cutting its massive bond-buying stimulus by US$10 bn per month is on auto pilot. As per Bloomberg, a survey of economists has confirmed that the Fed's rate hike move will come faster than expected. Thus the second step of monetary policy exit can have far reaching effect on global liquidity. Besides the US Fed is expected to release a new set of quarterly forecasts for key macroeconomic numbers. This includes unemployment, inflation, and GDP growth. Now, without enough comfort on the macro economic front, an aggressive rate hike could have far reaching impact on investor sentiments globally. The officials at the US central bank may not favour selling its portfolio of housing debt, now valued at US$1.65 trillion. However, that pressure is building to reduce its outstanding debt is obvious. Thus while one cannot time the Fed's rate hike move, investors would do well to be prepared for it. And this means expecting some FII money moving out of emerging markets. Needless to say that could have an impact on valuations of Indian stocks.

The Indian stock markets, after opening flat, plummeted in the post noon trading session on reports of tension in Iraq. At the time of writing, the benchmark BSE-Sensex was down by 385 points (down 1.5%). All the sectoral indices were trading in the red with power and realty stocks being the biggest losers. Majority of the Asian stock markets were trading in the red led by China whereas Japan was trading in the green. European markets have opened the day on a positive note.

04:50  Today's investing mantra
"There are no bonus points for complicated investments." - Warren Buffett
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19 Responses to "Ignore this and lose 99% of your insured policy value"

Debabrata Ghosh

Jun 26, 2014

Why ULIP did not fetch you good return

This is because of the commission paid to the agents. No agent will disclose the kind of commission they earn from the premium when they are selling you an insurance. Because it is a common practice for clients to ask for a cut from the commission the agent makes. According to an agent friend of mine, agents receive hefty commission only for the first 3 years. The Insurance company do not want any agent to continue for long. Agents are mainly interested in the first two commissions when they push the client for premium payment. After 3 years these agents are not bothered. In first 3 years you have already lost out more than 40% of your annual premium through commission and management fees.


Debabrata Ghosh

Jun 26, 2014

Similar incident happened with me. HSBC sold me TATA AIG ULIP in 2006. The process was done swiftly. Guy from HSBC arranged everything nicely and in one day all formalities were completed including medical test. I had to leave country and I did not get much time to understand the commission part. Later I came to know how HSBC earned 40% commission from my first premium. 30 % from second premium and something from 3rd premium.
When we went to HSBC bank to pay second premium we were asked to go to TATA AIG office and pay there. Did not even take the cheque from us and deposit with the principal. No courtesy to a client who fetches them lakh of rupees in commission.
I finally stopped the policy after paying 3 installments and redeemed after 5 years in 2011 with a loss of 30% capital plus interest.
These days i get call from call centers stating that some bonus has accumulated against my policy and when i ask them to send it to me, they hang up. I am surprised how an organization like TATA, number 1 in Indian IT business create such a software where a terminated policy does not show as closed even after 3 years.



Jun 22, 2014

It's very true that banks are misusing their position to sell ULIP policies. I took housing loan from ICICI bank. After few years, they unilaterally increased interest rate and forced me to buy ULIP policy to reset interest rate on housing loan.
I received fake calls from person claiming to be from IRDA about bonus and asking to buy new ULIP policies to get that money.
Even after filling FIR (police complaint), I still received calls from these fraudulent people to buy another ULIP.


Manish Ruparel

Jun 19, 2014

Read your Article on ULIP today ie. 19th June 2014. You are partially correct. Whenever you blindly trust anyone you will be hurt. Same in case of bancassurance. Also people loose because of their greed n lack of knowledge of markets. Then they blame ULIPs, Agents and IRDA also. I can prove traditional products are more harmful than ULIPs. If you have willingness to understand, contact me by mail.



Jun 19, 2014

I too am a victim of this corporate greed.



Jun 19, 2014

1. I wonder why and how even educated people get trapped to their bankers.
2. The simplest and surest solution to the whole problem is reducing commission to 2% and simultaneously banning all banks from selling all third party products. When they can not service their own clients with their own products and almost everyone is dissatisfied with the services of the banks why are they in the market to sell products which they can not do correctly and can not service.



Jun 19, 2014

This time none other than our country's favorite bank HDFC, has done the job of befooling customer that too by giving false commitement...as I was not keen on taking the policy the advisor from HDFC bank who was also a relationship manager assured me that in any circumstances you minimum returns 10% . And after selling the policy he refuted from his statement. ALL I WANNA SAY
HDFC chor hai , HDFC chor hai. I have stopped doing banking with them and done a fresh start with other bank.


Ganapathy Sastri

Jun 19, 2014

There are hardly any statistics on performance of funds managed by ULIPs. It is a BLACK HOLE out there. Generally ULIPs have underperformed their indices whether it be equity or debt. Even debt funds give LOW returns like 2% last year.
Charges for "MANAGING" ( or damaging) funds are very high. IRDA should restrict those charges as with mutual funds. No entry load, no exit load, AMC should be less than 1.5% for equity and 1% for debt funds.
Insurance companies charge, besides MORTALITY CHARGES, all kind of charges under EVERY CONCEIVABLE NAME and all these need to be restricted.



Jun 19, 2014

My son is one of the victims of ULIP.Agent did not advice him properly and after four years when he decided to foreclose and lost a hefty amount and was really taken for a ride. This was in 2008. The charges are very high and greedy agents only want their commission and Investors are not fully advised/informed and realise their folly at a later date.

Like (1)

Vinayak Deshpande

Jun 19, 2014

Regional manager of ICICI bank sold me 'ICICI Prudential Premier Life II Policy' to safe guard my life savings, safely grow it above rate of inflation without tax liability plus give me life cover five times my 'first year premium'! After five years of staying invested, I recovered 31 lakhs against investment of 32.8 lakhs! Alongwith high administrative charges, ICICI Pru recovered 'mortality charges on difference between insured amount and fund holdings' plus high % of my kitty as annual charges! Thus it got rich at my cost on 'sum insured' with mortality and handling charges! Performance of the fund manager deserved a lot of improvement in handling the kitty!

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