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The Sebi-Irda war is unlikely to impact your existing investments, but it is better to avoid Ulips, say experts

The war between the Securities and Exchange Board of India (Sebi), the stock market and the mutual fund regulator and the Insurance and Regulatory Development Authority of India (Irda), the insurance regulator, which reached astonishing proportions since Friday night, has seen a ceasefire.

Finance minister Pranab Mukherjee had to intervene to sort out the situation. The Sebi and Irda have agreed to maintain the status quo that existed before Sebi's ban on 14 life insurers from raising funds for unit-linked schemes. "To resolve any ambiguity and to ensure smooth functioning in the market, the regulators have agreed to jointly seek a binding legal mandate from an appropriate court," Mukherjee said.

Ulips are essentially investment plans which come with a dash of insurance. With this background in mind, what should you as an investor do? Here is the lowdown.

What happens to my existing Ulip?

This battle should not impact your existing investments say financial planners. Raunak Roongta, personal financial planner, says, "I don't see any reason, why investors should worry. Even if Sebi wins, how does it make a difference? It can be more beneficial to investors if Sebi also regulates. The money will be more secure."

Suresh Sadagopan, financial planner who runs Ladder 7 Financial Advisory, says, "If anything is decided it will not be applicable with retrospective effect. At this point, it doesn't look likely that the Sebi will win as there is too much at stake for the life insurance industry and they will push hard to make sure this doesn't happen."

The decision whatever it is will favour the investor, say experts. Ashutosh Wakhare, proprietor of Money Bee Institute, says, "If you are an existing Ulip investor then nothing changes for you. Sebi is the most investor-centric regulator. Even in its wildest dreams it will not do anything that will adversely affect the investor."

"If an investor has just taken the policy in the past 15 days then they should surrender it, unless they have invested after being aware of the details. Sometimes, even agents selling the product are not aware of the features of the product. They sell the highest NAV product as an equity product, but it is actually a debt product."

Should I buy Ulips this year?

Financial advisors suggest that you look before you leap to buy a unit-linked insurance policy. One of the main problems with such products is that it is impossible for an investor to figure out which is the best-performing Ulip in the market. Different insurance companies have different expense structures and hence their returns are incomparable. So, why settle for a product where you can't even figure which is the best deal available, the sales pitch of the agent or the company advertisement notwithstanding. "There should be standardisation terms and policy features so that comparisons between products become easier. Policyholders are now being ripped off by life insurers," said an insurance industry insider.

For those looking to buy Ulips now, Sadagopan suggests that a term insurance policy is a better deal is to get a term insurance policy and invest the rest of your money in other avenues such as mutual funds, fixed deposits, etc. Wakhare echoes this and says, "You should buy a term plan and invest in mutual funds." If you really want to invest wisely, he suggests. Term plans are pure insurance plans in which the nominee of the policyholder gets the amount of the life insurance in case the policyholder dies.

He reasons, "If you invest same Rs 10,000 in Ulips for 20 years, in the first 3 years, of Rs 30,000, only Rs 20,000 will get invested. This is because the first year charges for Ulips are around 20-30%. So only Rs 20-22,000 gets actually invested down the third year as the balance Rs 8,000 is deducted as charges. Considering that mutual funds charge only 2.5% as expense ratio, a far higher amount of Rs 29,000 will get invested at the end of three years compared with Rs 22,000 in Ulips - better off by Rs 7,000."

"From the fourth year onwards, both insurers and MFs have a charge of around 2.5%. So, when you pay insurance premium the real benefits start from the fourth year onwards. So, Ulips are complicated products. Under term insurance, you pay Rs 3 lakh over 20 years and get an insurance cover of Rs 25 lakh, which is a fair deal," Wakhare says.

Source : http://digital.dnaindia.com/