4 reasons why ULIPs get the

thumbs up
By Personalfn.com
Ask any individual who has purchased a life insurance policy in the past year or so and chances are
high that the policy will be a unit linked insurance plan (ULIP). ULIPs have been selling like
proverbial `hot cakes' in the recent past and they are likely to continue to outsell their plain vanilla
counterparts going ahead. So what is it that makes ULIPs so attractive to the individual? Here, we
have explored some reasons, which have made ULIPs so irresistible.
1. Insurace cover plus savings
To begin with, ULIPs serve the purpose of providing life insurance combined with savings at market-
linked returns. To that extent, ULIPs can be termed as a two-in-one plan in terms of giving an
individual the twin benefits of life insurance plus savings. This is unlike comparable instruments like
a mutual fund for instance, which does not offer a life cover.

2. Multiple investment options

ULIPs offer a lot more variety than traditional life insurance plans. So there are multiple options at
the individual's disposal. ULIPs generally come in three broad variants:

 Aggressive ULIPs (which can typically invest 80%-100% in equities, balance in debt)

 Balanced ULIPs (can typically invest around 40%-60% in equities)

 Conservative ULIPs (can typically invest upto 20% in equities)

Although this is how the ULIP options are generally designed, the exact debt/equity allocations may
vary across insurance companies. Individuals can opt for a variant based on their risk profile. For
example, a 30-Yr old individual looking at buying a life insurance plan that also helps him build a
corpus for retirement can consider investing in the Balanced or even the Aggressive ULIP. Likewise,
a risk-averse individual who is not comfortable with a high equity allocation can opt for the
Conservative ULIP.

 To read more articles on ULIPs, click here.

3. Flexibility
Individuals may well ask how ULIPs are any different from mutual funds. After all, mutual funds also
offer hybrid/balanced schemes that allow an individual to select a plan according to his risk profile.
The difference lies in the flexibility that ULIPs afford the individual. Individuals can switch between
the ULIP variants outlined above to capitalise on investment opportunities across the equity and
debt markets. Some insurance companies allow a certain number of `free' switches. This is an
important feature that allows the informed individual/investor to benefit from the vagaries of
stock/debt markets. For instance, when stock markets were on the brink of 7,000 points (Sensex),
the informed investor could have shifted his assets from an Aggressive ULIP to a low-risk
Conservative ULIP.
 Switching also helps individuals on another front. They can shift from an Aggressive to a Balanced
or a Conservative ULIP as they approach retirement. This is a reflection of the change in their risk
appetite as they grow older.
4. Works like an SIP
Rupee cost-averaging is another important benefit associated with ULIPs. Individuals have probably
already heard of the Systematic Investment Plan (SIP) which is increasingly being advocated by the
mutual fund industry. With an SIP, individuals invest their monies regularly over time intervals of a
month/quarter and don't have to worry about `timing' the stock markets. These are not benefits
peculiar to mutual funds. Not many realise that ULIPs also tend to do the same, albeit on a
quarterly/half-yearly basis. As a matter of fact, even the annual premium in a ULIP works on the
rupee cost-averaging principle. An added benefit with ULIPs is that individuals can also invest a
one-time amount in the ULIP either to benefit from opportunities in the stock markets or if they
have an investible surplus in a particular year that they wish to put aside for the future.
Personalfn offers personalised services for investments (including mutual funds, IPOs and bonds),
home loans and life insurance in Mumbai/Pune. For free no-obligation consultancy, please click
here. Not in Mumbai? You can still subscribe to FundSelect, our mutual fund advisory service!
HDFC Standard Life, a leading life insurer, offers policies that are designed to meet your

ULIPs vs Mutual Funds: Who's better?

October 15, 2005 15:30 IST

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in
terms of their structure and functioning. As is the case with mutual funds, investors in ULIPs are
allotted units by the insurance company and a net asset value (NAV) is declared for the same on
a daily basis.
Similarly ULIP investors have the option of investing across various schemes similar to the ones
found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to
name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an
insurance component.
However it should not be construed that barring the insurance element there is nothing
differentiating mutual funds from ULIPs.
How ULIPs can make you RICH!
Despite the seemingly comparable structures there are various factors wherein the two differ.
In this article we evaluate the two avenues on certain common parameters and find out how they
measure up.
1. Mode of investment/ investment amounts
Mutual fund investors have the option of either making lump sum investments or investing using
the systematic investment plan (SIP) route which entails commitments over longer time horizons.
The minimum investment amounts are laid out by the fund house.
ULIP investors also have the choice of investing in a lump sum (single premium) or using the
conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly
basis. In ULIPs, determining the premium paid is often the starting point for the investment
activity.
This is in stark contrast to conventional insurance plans where the sum assured is the starting
point and premiums to be paid are determined thereafter.
ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure.
For example an individual with access to surplus funds can enhance the contribution thereby
ensuring that his surplus funds are gainfully invested; conversely an individual faced with a
liquidity crunch has the option of paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). The freedom to modify premium payments at one's convenience
clearly gives ULIP investors an edge over their mutual fund counterparts.
2. Expenses
In mutual fund investments, expenses charged for various activities like fund management, sales
and marketing, administration among others are subject to pre-determined upper limits as
prescribed by the Securities and Exchange Board of India.
For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on
a recurring basis for all their expenses; any expense above the prescribed limit is borne by the
fund house and not the investors.
Similarly funds also charge their investors entry and exit loads (in most cases, either is
applicable). Entry loads are charged at the timing of making an investment while the exit load is
charged at the time of sale.
Insurance companies have a free hand in levying expenses on their ULIP products with no upper
limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.
This explains the complex and at times 'unwieldy' expense structures on ULIP offerings. The only
restraint placed is that insurers are required to notify the regulator of all the expenses that will be
charged on their ULIP offerings.
Expenses can have far-reaching consequences on investors since higher expenses translate into
lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses
have been dealt with in detail in the article "Understanding ULIP expenses".
3. Portfolio disclosure
Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit
most fund houses do so on a monthly basis. Investors get the opportunity to see where their
monies are being invested and how they have been managed by studying the portfolio.
There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our
interactions with leading insurers we came across divergent views on this issue.
While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory,
the other believes that there is no legal obligation to do so and that insurers are required to
disclose their portfolios only on demand.
Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the
lack of transparency in ULIP investments could be a cause for concern considering that the
amount invested in insurance policies is essentially meant to provide for contingencies and for
long-term needs like retirement; regular portfolio disclosures on the other hand can enable
investors to make timely investment decisions.
ULIPs vs Mutual Funds
ULIPs Mutual Funds
Minimum investment
Determined by the amounts are
Investment investor and can determined by the
amounts be modified as well fund house
No upper limits, Upper limits for
expenses expenses chargeable
determined by the to investors have
insurance been set by the
Expenses company regulator
Quarterly disclosures
Portfolio disclosure Not mandatory* are mandatory
Generally
permitted for free Entry/exit loads have
Modifying asset or at a nominal to be borne by the
allocation cost investor
 Section 80C Section 80C benefits
benefits are are available only on
available on all investments in tax-
Tax benefits ULIP investments saving funds
* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing
portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.
4. Flexibility in altering the asset allocation
As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely
comparable. For example plans that invest their entire corpus in equities (diversified equity
funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing
only in debt instruments (debt funds) can be found in both ULIPs and mutual funds.
If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from the
same fund house, he could have to bear an exit load and/or entry load.
On the other hand most insurance companies permit their ULIP inventors to shift investments
across various plans/asset classes either at a nominal or no cost (usually, a couple of switches
are allowed free of charge every year and a cost has to be borne for additional switches).
Effectively the ULIP investor is given the option to invest across asset classes as per his
convenience in a cost-effective manner.
This can prove to be very useful for investors, for example in a bull market when the ULIP
investor's equity component has appreciated, he can book profits by simply transferring the
requisite amount to a debt-oriented plan.
5. Tax benefits
ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds
good, irrespective of the nature of the plan chosen by the investor. On the other hand in the
mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked
savings schemes) are eligible for Section 80C benefits.
Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example
diversified equity funds, balanced funds), if the investments are held for a period over 12 months,
the gains are tax free; conversely investments sold within a 12-month period attract short-term
capital gains tax @ 10%.
Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term
capital gain is taxed at the investor's marginal tax rate.
Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique
set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both
offerings and make informed decisions.
ULIPs & You - Get the latest issue of Money Simplified today! Click here!
Here's how you can become a crorepati!

ULIPs: Be(a)ware of the risk

By Personalfn.com
Unit Linked Insurance Plans (ULIPs) all of sudden became a popular investment vehicle
with investors in the past one year. The reason: perhaps the bull phase or the lure of
market-linked returns that insurance companies have been advertising. But with the
markets now having corrected significantly, many investors are wondering whether they
should have opted for a ULIP in the first place.
A single cornerstone advantage ULIPs offer is that they leave the asset allocation decision
in the hands of investors themselves. You are in control of how you want to distribute your
money across the broad asset classes and how and when you want to reallocate. You can
withdraw from these plans (after the initial lock in period) without any tax implication as
withdrawals and death claim proceeds under ULIPs qualify for (capital gains) tax
exemption under Section 10 (10D) of the Income Tax Act.
But such flexibility can be a big disadvantage if you are not `an expert'. You could choose
to be more in equities (like you probably did late last year or early this year), when the
time is probably right to go into low risk debt. Or vice versa. The impact of such incorrect
decisions could be significant.
To understand the risk involved in taking a ULIP let's take a look at the table below -

ICICI (ICIC.BO, news) Life Link and Life Term Plan Birla Flexi Life Line Whole life Plan

Upto 40% equity Upto 100% equity Upto 10% Upto 35%

equity equity
*YTD (%) -2.7% -18.1%

*YTD -2.9 -7.0

*Year to date return for calender year
(%)

*Year to date return for calender year

As can be seen in the table, ICICI ULIP Growth Option's NAV (upto 100% investment in
equity) has declined 17.1% since January 1, 2004. ICICI ULIP Protector Option's NAV
(upto 35% investment in equity) has declined by only 2.8% largely because it has a lower
exposure to the stock markets. Similarly Birla ULIP's Enhancer's NAV (upto 35%
investment in equity), dipped 6.99% even as Birla ULIP Protector's NAV (upto 10%
investment in equity) fell only by 2.9%.
Indeed, those who had invested in the `aggressive' ULIPs have been badly hit. And
expectedly so. With higher risk, come higher returns. There is no debate there. However,
the issue here is that most investors ventured into these `aggressive' ULIPs on the belief
that returns will be nothing short of fantastic. That their hopes have been dashed is very
apparent. We at Personalfn have been approached by several ULIP holders requesting
guidance to surrender their policies, which have been sold to them by unscrupulous agents
on the basis of false `promises'.
What should you do now?
1. If already invested in a ULIP

Ensure that the equity component is in line with your risk appetite. If it is not,
make amends now. Do not wait for the markets to correct upwards.

2. Considering taking a ULIP?

 Do not get carried away by fancy projections made by unscrupulous sales

agents. Focus on your requirement and risk profile. At any rate give the
aggressive 100% equity plans a miss.

 Understand the cost of taking a ULIP. Sometimes a pure life insurance

and mutual fund combination may turn out to be more cost effective.
 Asset Allocator
HDFC Standard Life, a leading life insurer, offers policies that are designed to meet your
needs. To get to know more about these policies, please click here.
 Avail personal friendly investment advice (in Mumbai only) - from Personalfn

Investing in ULIPs? Read this first

Puneet Nanda | May 20, 2005

The introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest
innovation in the field of life insurance in the past several decades.
In a swoop, it has addressed and overcome several concerns that customers had about life
insurance -- liquidity, flexibility and transparency and the lack thereof. These benefits are possible
because ULIPs are differently structured products and leave many choices to the policyholder.
Hence, as a customer, you must carefully consider whether you can make such a product work
well for you. Broadly speaking, I believe that ULIPs are best suited for those who have a
conceptual understanding of financial markets and are genuinely looking for a flexible, long-term
savings-cum-insurance solution.
Put simply, ULIPs are structured such that the protection (insurance) element and the savings
element can be distinguished and hence managed according to one's specific needs.
Traditionally, the savings element of insurance has been opaque, giving policyholders no control
over asset allocation, no transparency, no flexibility to match one's lifestyle, inexplicable returns
and an expensive, complicated exit.
ULIPs, by separating the two parts within the same product, and managing them independently,
offer insurance buyers what no traditional policy had -- continuous information about how their
policy is working for them.
Often, people wonder whether it's better to purchase separate financial products for their
protection and savings needs. Certainly, this is a viable option for those who have the time and
skill to manage several products separately.
However, for those who want a convenient, economical, one-stop solution, ULIPs are the best
bet.
To understand how a ULIP meets the multiple needs of protection of both health and life; and
savings in the same policy, let us take the example of a 35-year-old man with 2 young children.
With a premium of, say, Rs 30,000 p.a. he could begin with a sum assured of Rs 5 lakh, for which
the life insurer would set aside a nominal amount of the premium to cover this risk. The balance
could be invested in a fund of his choice, possibly a balanced or growth option.
As the children grow, he might want to increase the level of protection, which could be done by
liquidating some of the units to pay for a risk premium. On the other hand, if he gets a significant
raise, he could increase the savings element in the policy by topping it up.
The chart below shows how one product can meet multiple needs at different life stages.
Integrated Financial Planning
Starting a Recently Married, Kids going to Higher studies Children
job,Single married, no with kids school,colleg for independent,
individual kids e child,marriage nearing the
golden years
Your Low protection, Reasonable Higher Higher Lumpsum money Safe
Need high asset protection, still protection, Protection, for education, accumulation for
creation and high on asset still high on high on asset marriage. Facility the golden
accumulation creation asset creation creation but to stop premium yrs.Considerably
but steadier steadier for 2-3 yrs for lower life
options, options, these extra insurance as the
increase liquidity for expenses dependancies
savings for education have decreased
child expenses
Flexibility Choose low Increase death Increase Withdrawal Withdrawal from Decrease the
death benefit, benefit,choose death benefit, from the the account for death benefit-
choose growth/balance choose account for the higher reduce it to the
growth/balance d option for balanced education education/marriag minimum
d option for asset creation option for expenses of e expenses of the possible.Choose
asset creation asset the child child. Premium the income
 creation. holiday-to stop investment
Choose riders premium for a option.Top-ups
for enhanced period without form the
protection.Us lapsing the policy accumulation
e top-ups to (with reduced
increase your expenses) for
accumulation the golden yrs
cash
accumulation

The key to good financial planning is to understand one's current and future financial goals, risk
appetite and portfolio mix. This done, the next step is to allocate assets across different
categories and systematically adhere to an investment pattern, so that they work in tandem to
meet one's requirements over the next month, year or decade.
Because of their flexibility to adjust to different lifestage needs, ULIPs fit in very well with financial
planning efforts. Moreover, as a systematic investment plan, ULIPs greatly diminish the hazards
of investing in a volatile market, and using the concept of 'Rupee Cost Averaging', allow the
policyholder to earn real returns over the long term.
When you're buying a ULIP, make sure you select one that works well for you. The important
thing is to look for and understand the nuances, which can considerably alter the way the product
works for you. Take the following into consideration.

 Charges: Understand all the charges levied on the product over its tenure, not just the
initial charges. A complete charge structure would include the initial charges, the fixed
administrative charges, the fund management charges, mortality charges and spreads,
and that too, not only in the first year but also through the term of the policy.

It might seem confusing at first, but a company provided benefit illustration should help
make this clearer. Some companies levy a spread between the buy and sell rates of the
units, which can significantly reduce the value of the investment over the long-term.
Close examination and questioning of such aspects will reveal the growing power of your
investment.

 Fund Options and Management: Understand the various fund options available to you
and the fund management philosophy and objectives of each of them.

Examine the track record of the funds thus far and how they are performing in
comparison to benchmarks. Who manages the funds and what experience do they have?
Are there adequate controls? Importantly, look at how easily you can access information
about your fund's performance when you need it -- are their daily NAVs? Is the portfolio
disclosed regularly?

 Features: Most ULIPs are rich in features such as allowing one to top-up or switch
between funds, increase or decrease the protection level, or premium holidays. Carefully
understand the conditions and charges associated with each of these.

For instance, is there a minimum amount that must be switched? Is there a charge on the
same? Must you go through medical underwriting if you want to increase the sum
assured?

 Company: Last but not least, insure with a brand you can trust to honour its commitment
and service you according to your requirements.

Having bought a ULIP, its important that you monitor it on a regular basis, though not as
frequently as you would a stock or mutual fund. Your ULIP is a long-term investment and daily
fluctuations in the NAV should not impact you.
Check once a quarter to see how your fund is performing, and consider a switch if there is a
change in the level of risk you are willing to take or in your personal market view.
Monitor your fund; value it in the few weeks or months before a planned withdrawal or top-up, or
a change in your lifestage or lifestyle. For those who are still finding their feet with their ULIP and
its multitude of options, the best thing to do is to consult your advisor.
Life insurance as a form of protection is the single-most important financial product any earning
member of a family must have. Having said this, a well-diversified portfolio is one of the first rules
of financial planning, and as such one should consider different instruments as the ability to save
increases. Certainly ULIPs successfully combine the first and most important need of protection,
with savings, and hence are an excellent addition to your portfolio. These can be combined with
various other products, after taking into account your risk appetite, financial goals and need for
portfolio diversification.
Possible investment options range from bank deposits and government small saving schemes to
mutual funds, stocks and property.
Buying a ULIP is quite different from buying a traditional insurance product; and sometimes there
are cases of people who believe they have been mis-sold a ULIP, the complaint most often being
that they were not aware of the risks or the charges.
All financial products have a certain amount of risk and charges, be it a mutual fund, property, or
even a bank deposit. It would be unrealistic to assume that the features and benefits of a ULIP
come at no cost, though the charges are considerably lower than that of a traditional product.
In fact, the very reason the product is transparent is because the customer knows the charges
and risks. Further, unlike other financial products, all life insurance plans come with a 15-day free
look, which allows you to return the policy if you believe it does not meet your needs or
expectations.
My advice to those who are looking to buy not just a ULIP, but any financial product: It is your
right and responsibility to ask for a company printed benefit illustration and brochure, and take
some time to read, understand and question it. After all, you are committing your hard-earned
money for years to come!
The author is Chief Investment Officer, ICICI Prudential Life Insurance.

Money Simplified, a publication from Personalfn, is now arguably India's most popular online
financial planning guide! Get your free copy today! Click here

More Specials

The markets have touched 12,000 and still counting. Experts are divided on the direction the
markets will take in the days ahead. Insurance agents will use the rising markets as
an opportunity to push sales of equity-linked insurance policies, But, if the markets take a dip
after you have invested, you will have little opportunity to exit. So, does it make sense to invest in
equity ULIPs?

On the other hand, mutual fund agents will tempt you with new fund offers with little or no lcok-in.
So what do you do?

One year returns of equity ULIPs

NAV as on Experts told moneycontrol, that ULIPs will give
Company Growth good returns only in the long-term, irrespective
9th Sept 04 9th Sept 05 of market levels and for the short-term, mutual
ICICI Pru Life 19.83 29.38 48% funds will do fine. Given that ULIPs are good
Aviva 11.136 18.484 66% for the long-term, experts suggested tips to
make the most of ULIP investments in this bull
run.
1. Stay invested for the long-term - at least seven years
Chief Investment Officer, ICICI Prudential Life Insurance, Puneet Nanda told moneycontrol, "Life
insurance, and hence ULIPs, should be viewed as a long-term investment. Hence, any person
buying such a product must do so, with a long-term horizon, say 5-7 years at the least, in which
case, the immediate level of the markets do not make a huge difference."

Head of Marketing at HDFC Standard Life Insurance, Sanjay Tripathy agrees, "There is never a
good or a bad time for investing in equity funds of ULIPs, if you are looking to remain invested for
a long period (more than 10 years)."

1-year 3-year 5-year 7-year 10-year 15-year 20-year

Probability of loss 10/26 5/24 3/22 3/20 1/17 0/12 0/7
Avg Return 27% 18% 17% 17% 18% 19% 17%
The table above shows the relationship between the period of investment and the chances of
loss. For instance, had you invested in the Sensex for any one year period between 1979 and
2005, in 10 out of those 26 years, you would have lost money. But had you stayed invested for
more than 10 years, your chances of loss would be almost zero. And that, at an average return of
17-18% per annum.

For a complete analyses of the table, click here.

Nanda adds, "As ULIPs are a long-term investment, the underlying funds are also managed with
the philosophy of delivering long-term risk adjusted returns."

2. Invest systematically
Certified Financial Planner Kartik Jhaveri suggests, "I would say that for any equity investment of
less than seven years, mutual funds are better options. ULIPs are good if you are looking at a
time horizon of more than seven years. And more so, I would recommend regular investment."

Just like a systematic investment plan, SIP, is useful for rupee cost averaging in a mutual fund
scheme, the same can be applied to ULIPs. Says Nanda, "We encourage our customers to invest
regularly, in a monthly/quarterly mode, which works as a systematic investment plan and enables
them to reap the benefits of the highs and lows of the market."

3. Don’t be tempted by a short-term exit option

Apart from the fact that returns from equities even out in the long term, Jhaveri gives more
reasons why a ULIP makes sense for a longer time horizon, "In ULIPs, the administrative costs
are collected upfront from the first year’s premiums. These costs would be recovered only in a
longer period and hence it makes sense to hold on for the long-term."

While insurance agents may convince you that you can withdraw after a period of three years,
Jhaveri advices that its best to put off the temptation to exit.

Moneycontrol did a bit of number-crunching, to find out how long it takes for charges to be
recovered. Even if your fund grew at 10% a year, every year, it would still take you anywhere
between 3 and half to 5 years to recover your premium amount, let alone get returns. So you
would make profits only after that time period. Of course, if your fund grows faster than 10%, the
breakeven would happen faster.

4. Watch your risk profile, not market movement

Tripathy says, "For effective planning, one has to understand the current and future financial
goals, risk appetite and portfolio mix. Once this is done, the next step is to allocate assets across
different categories and systematically adhere to an investment pattern."
This also means that, if you think you have made enough in equities and want to move to a safer
option, you can always switch to a debt option.

Nanda agrees, "The rules which apply to any person is - to understand his/her risk profile and
time horizon and then invest with a company, that they are comfortable with." Moreover, Tripathy
advices that investors should look at their lifestage needs before choosing their ULIP.

5. Look at product features

Tripathy says, "For good long-term value, the investors should look at product - features, flexibility
and the charging structure, particularly the fund management charges. Investors should also
keep in mind the past performance of the fund, with respect to benchmark indices and the quality
of the stocks in the portfolio."

by Deepa Venkatraghvan

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If we want to go to Goa from Mumbai there
are several vehicular options. We can travel
by airplane, drive in car or bus, take a train or
sail in ship. Similarly when we want to make
any kind of investment, there are different
investment vehicles e.g. mutual fund,
portfolio management services (PMS,) direct
(investing on your own in stocks, Bank FDs,
gold, property, etc), insurance etc.
Goa is the destination and airplane; car;
bus; train, ship etc are vehicles. Similarly,
debt, equity and property are asset classes
and mutual fund; PMS; 'direct' and insurance
are investment vehicles. It is important to
clarify here that property includes real estate,
bullion, collectibles, art etc. To invest in Debt,
Equity & Property we have to choose
investment vehicles, which suit are

Vijaya Bank Q1 net seen up at

requirement. (Also read - Quick buck for lazy
Rs 33.90cr investors. Here's how!)
In earlier times 'direct' was the only
IDFC Q1 net profit seen at Rs
97.55cr investment vehicle available. If we wanted to
buy fixed deposit/bond we had to apply on
our own. Similarly, when we wanted to buy
 shares, we had to call up
stock brokers, who would
procure shares on our behalf
and same was the case with
property. The cost involved
in 'direct' buying is least amongst all
investment vehicles. However we need to
have skills and time to use this form of
investing.
Another investment vehicle is a mutual fund.
Mutual fund works on the concept of pooling
in money. Assume there are 5 to 6 friends
who want to invest money in a particular
asset class say equity. Also assume they do
not have skills and time. However one of
them knows an expert who regularly invests
in stock markets. All these friends go to an
expert and give him their investment amount.
The expert invests on their behalf. If there is
profit in investment, they all benefit and if
there is any loss they suffer. Experts get
certain fee for investing on their behalf. This
is the concept of a mutual fund. Investing in
mutual fund is slightly expensive than "direct"
form of investing. However the decision-
making and procedure of investing is
transferred to the Mutual Fund
Company. (Also read - One-stop guide: How
to profit through Mutual funds?)
Insurance as an investment vehicle works
somewhat similar to mutual fund as far as
ULIPs are concerned. While traditional
insurance plans invest only in debt-based
products and are not market linked, ULIP
invests in debt, equity as well as a
combination of the two. Only difference in
case of insurance is that expenses charged
by insurance company are much higher
compared to most other investment vehicles.
PMS is usually tailor-made for your needs.
Based on your financial goals portfolio
managers create investment portfolio for you.
For creating and maintaining your portfolio,
PMS charges fees. Also if your portfolio
earns profit beyond a certain amount, then
the portfolio manager shares the profit.
However if there are losses then the same is
charged to your account only.
While choosing any investment vehicle keep
in mind your skills, time available with you to
create and maintain your investments and
costs involved.
If you have the skills and time available with
you then "direct" form of investing is ideal as
it has least of costs amongst all other
vehicles. (Also read - One-stop guide: How
to profit through Mutual funds?)
On the other hand insurance is the most
expensive investment vehicle and hence it
should be kept away from as far as possible.
PMS services works better for wealthy
(high net worth) individuals. Though profits
have to be shared, there is also advantage of
getting tailor-made portfolio. Only catch is to
ensure that portfolio created and maintained
for you is tailor-made and that the PMS is not
another mutual fund scheme, where all
investors get the same portfolio.
For small and medium investor – who
does not have skills and time – mutual
fund seems the best option.
Currently in India we have mutual funds,
which invest in two asset classes, debt and
equity. However in the very near future there
is a likelihood of having mutual funds, which
will invest in gold as well as real estate.
How to choose mutual funds based on
our goals...
contd on Page 2...
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We can choose mutual funds based on our goals...
If funds need to be parked for contingencies, we can choose either liquid funds (if amounts are
large) or short term debt funds. There are some fund houses which gives ATM access to debt
based funds.
For goals, which are 1 to 3 years away, choose debt based funds. In raising interest rate scenario
consider floating rate funds, while if interest rates are falling invest in pure income/bond funds.
For goals, which are likely to happen between 3 to 6 years, use combination of debt and equity
based funds.
When goals are 8 to 10 years away, equity is the best option. Over a long term, equity has
usually beaten inflation by vast margins and probability of losing money is very low. If you are
new to equity investing, start with index funds. Index funds replicate the index e.g. Sensex based
index fund will invest in only those companies, which are constituents of the Sensex.
As and when you get comfortable with equity investing, move to diversified equity funds, which
invest in large cap companies. Large cap companies are well-established companies having long
presence. They are usually less volatile than small-mid companies and can withstand downturns
in economy better than newer companies. (Also read - Make volatile markets an opportunity, not
a threat)
Small and mid cap companies rise and fall faster. On risk ladder they are more risky compared to
large companies but can also give higher returns (and severe fall.) Having gained confidence with
large cap companies, move to mutual funds, which invest in small-mid companies.
Once you are a ‘fish in water’ with volatility of equity markets, consider sector funds. These funds
invest in single sector as IT, Banks, FMCG. They are very high on risk ladder.
Mutual Fund as an investment vehicle is the most convenient vehicle for investing in various
assets classes. It gives benefit of professional management, option of investing in smaller
amount, quick liquidity and diversification benefit.
The author is Gaurav Mashruwala, a Certified Financial Planner. He may be reached at
gmashruwala@gmail.com