Rising markets but ULIPs yet to recover from the downfall Oct 09, 2009

Rising markets but ULIPs yet to recover from the downfall

Oct 9, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	16,843.54	291.0	1.70%
Re/US$	46.34	1.4	2.97%
Gold Rs/10g	15,870.00	230.0	1.47%
Crude ($/barrel)	67.45	0.5	0.68%
FD Rates (1-Yr)	4.75%-6.50%

Weekly change as on Oct 8, 2009

Rising markets but ULIPs yet to recover from the downfall

Impact

If some insurance agents are selling you Unit Linked Insurance Plans (ULIPs), you have got to be wary. In the recent times it has been seen that premiums in the insurance industry are more concentrated towards ULIPs.

Over the last couple of years, markets have gone through turbulent times. The chart below indicates that Rs. 100 invested in equity mutual funds on January 1, 2008, is worth Rs. 101 (under HDFC Top 200) and Rs. 91 (under DSP BR Top 100) on October 6, 2009; whereas in ULIPs it is worth Rs. 78 (under Kotak Aggressive Growth Plan) and Rs. 84 (under ICICI Flexi Growth Plan) over the same time frame. This clearly depicts the fact that, though these ULIPs are actively managed, they are yet to outperform the market (i.e BSE Sensex). On the contrary the mutual fund schemes under consideration have outperformed the market.

Comparative Returns Performance of Sensex vs. Equity Mutual Funds vs. ULIPs

(Base: Rs.100)
(Note: Study was done on two life Insurance companies namely ICICI Prudential Life Insurance & Kotak Life Insurance)
(Source: Crisil Fund Analyser, respective Insurance companies)

In addition to the lagging performance, the charges in ULIPs for the first three years are considerably high, which eventually reduce from third year onwards. This has a direct impact on the returns because the investor's money actually invested in ULIP is eaten off by these high charges.

Therefore for investments in ULIPs one must be prepared to stay invested for long term i.e. more than 10 years to yield better returns. Also, we have always recommended that an investor should look at their investment and insurance needs separately. Insurance needs should be met only through term insurance plans, and not ULIPs.

Are you ready to take the tax pain?

Impact

Under the Income Tax Act 1961, your Provident Fund (PF) contribution enjoys the Exempt-Exempt-Exempt (EEE) status. Interestingly many of us also get swayed by this status, but the devil always lies in the fine print.

If an employee withdraws the amount standing to the credit of his Employee Provident Fund (EPF) account before rendering 5 years of continuous service, she would be taxed. The chargeability of such an amount withdrawn under the current tax laws will be as under:

Employer's contribution along with the amount of interest accrued thereon would be taxed as salary income

Employee's contribution will be taxable as salary income to the extent of the deduction claimed by her under the Income Tax Act,1961

The interest earned on employees total contribution will be taxed as 'income from other sources'

However, the aforementioned provisions will not apply to employees who have rendered more than 5 years of continuous service, thereby enjoying the EEE status.

To the relief of the employees, withdrawal of EPF amount under the following circumstances will not be taxed:

Employees retirement on account of permanent and total disablement, due to body or mental infirmity

Employees migrating from India for permanent settlement abroad or for taking employment abroad

Mass or individual retrenchment

On retirement from service after attaining the age of 55

Termination of service under a voluntary scheme of retirement framed by the employer and the employees under a mutual agreement

On ceasing to be an employee of any establishment to which the PF Act applies

Under the draft Direct Tax Code (DTC), which is expected to replace the existing Income Tax Act, 1961 effective April 2011, the EPF will have the Exempt-Exempt-Tax (EET) status.

In our opinion, EPF is an excellent savings medium and if used in the right manner would help employees in tax and retirement planning. However if the DTC goes through as proposed, the game would change.

Travel safe for few rupees more

Impact

If you are a frequent traveller it is ideal you travel safely and with peace of mind.

Travel insurance means indemnity against loss, injury, damage or expense caused by accident, injury, sickness, theft, cancellation or interruption of travel arrangements or other events or threats arising during or in connection with travel or intended travel by an insured person. Hence broadly speaking it covers:

Medical expenses

Financial expenses

Other losses incurred whilst travelling

These include losses incurred in both domestic as well as international travel.

Travel insurance can be purchased from the general insurance companies or directly from the travel agent. Some general insurance companies such as ICICI Lombard, HDFC Ergo, Reliance General Insurance and Tata AIG offer this product. You can insure yourself right from leisure travel to business travel.

For instance, ICICI Lombard's travel insurance offers three types of plans, each for a coverage amount of USD 100,000. The premium for a 35 year old individual travelling to USA for 30 days is Rs. 1,714 under the Gold plan, Rs. 2,455 under the Platinum plan, and Rs. 3,548 under the Annual Multi-Trip plan. Under Reliance's travel insurance plan, the same individual would pay premiums of Rs. 1,143 under the Standard plan, Rs. 1,552 under the Silver plan, Rs. 1,801 under the Gold plan, and Rs. 2,192 under the Platinum plan. However, one must research the different features of these various plans, as a direct comparison cannot be made.

Travel insurance has certain exclusions which are pre-existing medical illnesses, pregnancy related expenses, injury or illnesses caused due to the use of alcohol or drugs, war or terrorism (but some plans cover these risks too).

One must take into account the following points while buying travel insurance:

Number of days of your trip

Compare the premiums against the benefit

Watch out for the exclusions

Always take the toll free numbers of the region where you are travelling

We recommend travel insurance, as few more rupees spent on the premium would ensure that you travel safely, happily and with peace of mind

NRE Savings Account outshine NRE Term Deposits

Impact

If you or any of your relatives are NRIs and are looking at India for investing money in term deposits, then this is for you.

Your Non-Resident External (NRE) term deposit account is offering much lower return than an NRE savings bank account, as shown in the chart below. Some of the banks that offer this NRE savings account are HDFC and State Bank of India.

NRE Term Deposit Rates
Maturity	Interest Rates (%) p.a.
1 yr < 2 yrs	3.01
2 yrs < 3yrs	3.10
> 3 yrs	3.67
NRE Savings Bank Interest Rate 3.50% p.a.

(Source: Website of respective banks)
(The rates remain common with all banks)
Apart from the better interest rates offered under the NRE savings bank account, the account also offers the following advantages:

NRE savings bank interest rates are fixed

If the investor withdraws she will earn interest on the outstanding amount in the account

NRE savings account earns interest of 3.5% p.a. or 0.29% per month on the minimum balance kept in the savings account from 10th of the month to the last day of the month. The frequency of interest payment is quarterly

Money in the savings bank account can be repatriated any time

There is liquidity

On the other hand, the NRE term deposit account has the following disadvantages:

NRE term deposits fluctuate with the London Inter Bank Offered Rate (LIBOR)

If the investor withdraws money before maturity she will not get any interest and/or attract penal interest as imposed by some banks

The money is locked-in till maturity

We opine that investors should invest in NRE savings account by maintaining the same balance as they would have maintained in NRE fixed deposits (FDs), along with putting additional funds in the savings account to meet monthly expenditures.

For example, if you are planning to invest Rs. 100,000 in NRE FD for a year @ 3.01% p.a., then you could keep that money in a savings account, plus maintain additional funds for meeting your monthly expenditures. However, you should ensure that the balance does not fall below Rs. 100,000. This will earn you interest of Rs. 3,500 instead of Rs. 3,010.