Should you invest in ULIP ?

"Where principal gets eroded
along the time can't be
called as investment" - Me :)

This is exactly where the ULIP fits in. This article is written for the audince with little or no knowledge about the staock market and different mode of investment, and for them who are planning to do some investment for sake of saving tax or without it. I am damn confident that atleaset 8 out of 10 who have invested in ULIP (Unit linked insurance Plan) hardly knows how it function and what so bad about it.

It's like Mutual fund+Insurance in a single go. Since it falls in two category i.e. mutual Fund under SEBI reguration and Insurance under IRDA, so no one really bother to take care of this ULIP as a whole. And there is a reason of telling **ULIP are bad** and why it is bad?

Ok Assume Mr X is on a ULIP where he pays a premium of 20K per year. So if that ULIP has a Unit calue of 10 he will get 2000 units. As on when stock market goes up the unit value also increase. So if lets say the NAV is in proportion with sensesx. So if sensex goes up by 20% in 6 months so is NAV from 10 to 12 and your current asset should be 2000 X 12 = 24000 INR. But in reality it is not. The NAV will shoot up but not your asset.

1)Fund allocation: They use a funny word as fund allocation. if the ULIP says fund allocation is 60% that means the guy who just convinced you to take the policy will eatup 40% of your premium.

That means you invested =20000
Commision of the agent (40%) =8000

Net money that are invested is =12000

2) Account maintenance: Another jargon. They are maintaing a account for you and doing an investment. Its not free. Since they keep your money its there right to deduct to MAINTAIN the account. In simple terms to feed the executive, office maintenace and all. It can vary, no documentaioni found. In the tune of 3-10%.

So Now each quarter they will deduct lets say 5%, so annual 20% which translates to 2400, so after this

Net money invested is = 9600

3) Term Rider: its logical. They are doing insurance for you as well. So that premium is also going to be deducted from the premium. Again depends on what is teh sum you have insured. Assume 500 per year.

Net money invested is = 9100

This is the money that goes for investment. So the day you pay the premium you make sure you loose more than 50% irrespective of the market. So if the sensex goes from 9000 to 18000 under a hypothetical case, and propotionately the net investment goes to 18200 but cant be able to touch your principal. Now you decide is this a worth investing. And can you believe the amount of money they are managing in India 15000 crore.

Let me be silent about dozen other hidden rules when u want to pre-close the account. You are gone.

Note: Finally last month SEBI has banned 14 organisation to stop ULIP with immedia effect

Cheers