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Sebi bars 14 firms from issuing Ulips

Sebi bars 14 firms from issuing Ulips
Bs Reporter / Mumbai April 10, 2010, 0:55 IST

The Securities and Exchange Board of India (Sebi), the capital markets regulator, restrained 14 insurance entities from raising fresh money through Ulips - Unit Linked Insurance Products. In a late evening notice posted on the Sebi website, the regulator said insurance companies need its approval before launching any product with an investment option.

There is already a tussle on the subject between Sebi and the Insurance regulatory Development Authority (Irda), on who had the jurisdiction to regulate Ulips and, by extension, any other insurance product with an investment component. Irda has already made it clear that Sebi should keep off from what it believes is its turf alone. The product (Ulip) is being sold as an insurance component and regulating that is its job, not Sebi’s, was Irda’s view.

STOP ORDER

firms against whom prohibitive orders have been passed

* Aegon Religare Life Insurance Company Limited

* Aviva Life Insurance Company India Limited

* Bajaj Allianz Life Insurance Company Limited

* Bharti AXA Life Insurance Company Limited

* Birla Sun Life Insurance Company Limited

* HDFC Standard Life Insurance Company Limited

* ICICI Prudential Life Insurance Company Limited

* ING Vyasa Life Insurance Company Limited

* Kotak Mahindra Old Mutual Life Insurance Limited

* Max New York Life Insurance Co. Limited

* Metlife India Insurance Company Limited

* Reliance Life Insurance Company Limited

* SBI Life Insurance Company Limited

* TATA AIG Life Insurance Company Limited

The insurance companies named in the Sebi order are Aegon Religare, Aviva, Bajaj Allianz, Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa, Kotak Mahindra Old Mutual, Max New York Life, Metlife India, Reliance Life, SBI Life and TATA AIG Life. The 11-page order, which takes effect immediately, was issued by Sebi’s whole-time member Prashant Saran.

“It is... necessary to restrain the entities... from raising further monies/subscription, new and/or additional, from the investors for any product (including Ulips) having an investment component in the nature of mutual funds till they obtain registration from Sebi,” says the order. It, however, does add that the “order will not affect soliciting money/subscription from public with respect to any pure contract of insurance or the insurance component of a combination product”.

According to Sebi, many characteristics of Ulips push it under its purview. “The product is unit-linked and money is raised from the public through sale of units to them... premium will be used to allocate units in the fund chosen by the investor... the product has characteristics such as fund management, charges, switch and partial withdrawal options,” argued the Sebi order.

It said Ulips offered by insurance companies were different from traditional insurance products, being a combination of insurance and investment. “The attributes of the investment component of Ulips launched by these entities are akin to the characteristics of mutual funds, which issue units to the investors and provide exit at net asset value of the underlying portfolio,” said the Sebi order.

And, made clear its stand that the Sebi Act clearly said any product with exposure to the securities market comes under its purview. “The Sebi Act and the regulations made thereunder are also special laws made/laid before Parliament and any investment product or investment contract having any characteristic of securities or exposing investors to securities’ market risks is under the jurisdiction of Sebi under the Sebi Act,” said the order.

Some of the insurance companies sought a personal hearing, which was not given. “Some of the entities also sought an opportunity of personal hearing. I note that each entity has been served with separate notices and each of them has availed of the opportunity of making its written submissions,” explained the Sebi order.


see hereULIP Order

Does your index fund mirror index returns?

Does your index fund mirror index returns?: "

As an investor in an index fund, most of you would be clear—you do not want fund managers to manage your money, but want your returns to mimic those from the benchmark index. Since buying all 50 scrips that are part of, say, the Nifty is not possible, you invest in an index fund that tracks Nifty. But when your index fund starts to outperform, or worse underperform, the index consistently, should you be worried?

Deviating performance

We took a look at the performance of index funds across different time periods. We looked at their one-year returns over four different month-ends (March, June, September and December) in 2009 and 2008. Though index funds are mandated to return almost in line with their respective benchmark indices, often many of them have given returns that are way off the mark. For instance, as on December 2009-end, LIC Index-Nifty returned 65.86% against its benchmark index, Nifty (total return index), which gave 73.2%. As on June 2009-end, while Sensex (total returns index) returned 11.8%, HDFC Index Fund–Sensex returned just 3.85%. Such examples are not uncommon in the space.

Also See The great divide (Graphic)

Passive management

If your index fund is underperforming its benchmark index by a huge margin, it’s bad news. But if it outperforms the index, it’s not good news in the long run either. Here’s why.

Index funds are mandated to be passively managed. Unlike actively managed funds that decide which scrips to buy, sell and when, index funds merely invest in all the scrips—in the same proportion in which they lie—in the benchmark index. So, even if your index fund occasionally outperforms, it doesn’t necessarily mean it will always do so. It is not an index fund’s mandate to actively outperform the index. If you are looking for outperformance, you may want a fund manager’s intervention through actively managed funds.

Tracking error

Index funds, much like other mutual fund schemes, incur expenses on cost heads, such as marketing, advertising, office administration, brokerage and so on. These expenses reduce your scheme’s returns. This deviation in performance is called tracking error and is expressed in percentage terms.

The lower the tracking error, the better the fund. Most mutual funds have mentioned an upper limit of 2% as the permissible tracking error limit in their offer document.

Managing inflows

How well an index fund manages its inflows and outflows also determines tracking error. While investors can invest in a fund till 3pm to get the same day’s net asset value (NAV), index funds only have between 3pm and 3.30pm to realign their portfolios (buy and sell existing or new scrips that may have entered or exited the index) and deploy additional inflows in the market by buying a fresh stock of scrips. If application comes in the last moment, close to, say, 3pm, but the fund comes to know about it much later, it can deploy this application in the market only the next day.

However, the investor gets the same day’s NAV as he invested before 3pm. Any sharp movement in the markets in the interim distorts the inflows and leads to a tracking error.

Fund houses are increasingly working to improve their internal communication and sensitize their branches so that information about inflows reach the fund managers in time. “We have focused on setting right procedural issues involved in reporting of inflows. We are confident that these have been set right and, hence, our tracking record is expected to reduce in future,” says Vinay R. Kulkarni, senior fund manager, HDFC Asset Management Co. Ltd.

Additionally, funds such as LIC MF have stopped accepting large-sized inflows on days that it feels it can distort the fund’s balance. “We don’t want volatile entries,” says S. Ramasamy, fund manager, LIC Mutual Fund Asset Management Co. Ltd.

At times, when the weights of the underlying scrips of an index change, index funds are mandated to buy and sell accordingly to rebalance their portfolios. Selling scrips would fetch them money after two days, but they need to pay money for scrips they have bought within a day. “Such imbalances of payment also lead to tracking error,” says Krishnan Daga, fund manager, Reliance Capital Asset Management Ltd.

High cash levels

Though most index funds can hold cash up to 10%, some exceed their cash levels at times to account for unexpected inflows or to make provision for unexpected redemption. If index funds have high cash levels, they don’t move in tandem with their benchmark index, thereby causing a higher tracking error.

Industry sources say that apart from small corpus sizes, some index funds also delay deploying their cash if they feel that the equity market will drop. Sources add that some index funds invest in derivative instruments. For instance, if the fund manager feels that markets are going to fall, they hedge their portfolios by selling index futures. Though such moves bring temporary relief, they can backfire if your fund manager fails to predict the market correctly.

What’s the alternative?

With investors yet to warm up to the idea of index funds, their tiny corpuses will always be susceptible to a sudden gush of money coming in every once in a while. It’s how your index fund manages its internal systems that will ensure timely deployment of money and lower tracking error.

Index funds from fund houses, such as Franklin Templeton, UTI, Principal, ICICI Prudential and so on, have consistently managed a low tracking error.

Alternatively, you can opt for exchange-traded funds (ETFs). These are close cousins of index funds as they, too, invest in a basket of index scrips. However, on account of their superior structure, these funds mimic their respective indices as closely as possible, incur lower expenses and also sport a much lower tracking error.

Since ETFs are only available on stock exchanges, you need a demat account to invest in them. The other drawback is that you cannot start a systematic investment plan (SIP) through them. For SIPs, you still need an index fund.

Graphic by Ahmed Raza Khan/Mint

kayezad.a@livemint.com

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News notes

News notes: "

Sebi moves to protect MF investors’ money

On 29 March, the Securities and Exchange Board of India (Sebi) sent an email to mutual fund (MF) houses that they can’t dip into their scheme’s pockets to pay upfront commissions to agents.

Dipping into savings: MFs pay a combination of upfront fees and trail (loyalty) fees to agents. While upfront fee is paid when the agent gets fresh subscriptions, trail fee is paid based on the time the clients stay invested in the fund. Ever since Sebi banned entry loads (charges up to 2.25% imposed at the time of investing, which eventually used to get passed on to agents as their commission), fund houses appear to have been dipping into their reserves to pay upfront commissions.

Before Sebi banned entry loads on direct applications in January 2008, investors used to pay 2.25% entry loads to fund houses. Since fund houses did not pay the agents for such applications, this amount was accumulated in the scheme’s profit and loss account. Further, though entry loads on direct applications were abolished in January 2008, they used to save money from the scheme that would have otherwise been paid to agents as trail commission. Additionally, equity funds charge up to 2.5% expenses to the scheme every year as annual expenses, out of which they meet their administration and office costs, besides their marketing and selling expenses. Any savings here, too, got accumulated in the scheme’s account.

Putting a stop: Ever since Sebi abolished entry loads in August 2009, fund houses have come up with ways to compensate the agents. One way was to dip into the scheme’s reserves out of the money accumulated or saved in the past, to pay distributors.

With the latest directive, Sebi has reiterated that the burden of upfront commissions should not be passed on to the investor. “The spirit behind scrapping entry loads is that investors should get the benefit of lower costs. Else, if loads are paid out from the scheme’s reserves, the purpose behind the regulation is defeated,” says Rajesh Krishnamoorthy, managing director, iFast Financial India Pvt. Ltd.

--Kayezad E. Adajania

‘Ulips more popular in Tier II, Tier III cities’

Fiscal year 2010-11 will see the continuation of two broad trends in the life insurance space: changing distribution strategy and guaranteed products. The global financial crisis exposed the hit-and-run sales practices of the industry that focused on getting more first-year policyholders than continuity. Says Anand Pejawar, executive director, marketing, SBI Life Insurance Co. Ltd: “The focus initially was to grab a larger market pie—in this case, the first-year premium. Mis-selling was rampant. Now the industry has woken up to the fact that continuous flow of premiums is important.”

The stock market crash brought home the risks of unit-linked insurance plans (Ulips) and lapsation rates zoomed. Adds Pejawar: “The rate of lapsation increased in 2008 and 2009 because of the slowdown. Investors who were ill-informed and had invested mainly due to the prior market boom skipped premiums during the crash.”

To address these issues, 2009 saw a spurt of guaranteed products in the Ulip space. Guarantees, ranging from maturity bonuses to capital protection, became the flavour of the year.

A recent survey conducted by Boston Analytics, a financial research firm, has confirmed this trend. According to the Monthly Indian Consumer’s Savings and Investment Behaviour Report, there has been a marked rise in investments in Ulips in smaller cities. But the preference for Ulips has remained almost the same in metros and tier I cities over the past seven months, says the study.

The report surveyed about 10,000 people across 15 cities and towns. “Among those insured, about 80% of consumers surveyed in tier II cities and 75% in tier III cities had invested in at least one Ulip in the past year. Compared with this, just 61% of consumers in metros and tier I cities invested in Ulips in the previous year,” says the report.

Says Debopam Chaudhuri, economist, Boston Analytics: “Ulips that offer guarantees are becoming popular with tier II and tier III cities because they dabble in equities and, at the same time, offer some capital protection by way of guarantees.”

-- Deepti Bhaskaran

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Did you know? | Group mediclaim can’t be carried forward

Did you know? Group mediclaim can’t be carried forward: "

If you have a group insurance cover from your employer and you quit mid-year, you can’t carry your insurance benefits with you even if you have paid the premium for the entire year.

Why you can’t carry the cover:

In a group cover, you get health insurance from your employer and not the insurer. Till the time your insurer continues the cover, you have an insurance under the group policy. However, as soon as you quit, you are out of the group health cover that the insurer gives to your employer. By that logic, you can no longer use the insurance card.

But you paid an annual premium:

It doesn’t matter if you paid the premium at the beginning of the year. The minute you leave the firm, the insurance benefits will stop. Typically, the employer deducts this premium from your salary. Some companies, however, pay the premiums on the employees’ behalf for the entire year.

Is the money refunded?

If you paid the premium for an entire year and you quit mid-way, the insurer refunds the premium on a pro-rata basis to your employer. While some employers reimburse this amount in your full and final settlement, most of them do not. If you have paid for your health insurance policy under the group scheme, its worthwhile to ask your employer to reimburse the money. They may. They may not.

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livemint.com - Highest NAV guaranteed, but not the best returns

Highest NAV guaranteed, but not the best returns

Deepti Bhaskaran
What do you think when you see the giant ads promising you the highest net asset value (NAV) in a unit-linked insurance plan (Ulip)? Most of us would believe that we’d get the highest possible return with zero risk.


But knowing, as you do too, that nothing comes for free, we put all the products that are guaranteeing NAVs under scanner. The quick conclusion: your returns will be between 6% and 15% in the long term. Shave off another 3% for cost and suddenly the guarantee looks a bit weak.

Concept
Essentially, these are capital guarantee products that ensure that the amount you invest does not lose value and you get some upside of equity. It is erroneous to think that you get Sensex-linked return, with zero risk. Ashwani Gujral, chief market strategist, Ashwanigujral.com, a stocks investment advisory portal, says: “These funds can’t guarantee the pure return of an equity fund. To guarantee returns on equity, you need to assume the risk on equity.”

Let’s understand how these funds work. Most of them use an investing strategy called dynamic hedging or constant proportion portfolio insurance (CPPI). Under this, the fund manager will constantly reallocate money between debt and equity classes to assure the previous highest NAV.


In year one, your investment will be split between debt and equity in such a manner that you get an assured NAV of Rs10 at the end of 10 years. Over the year, if the equity market goes down, your capital stays put as you have bonds. But if the market goes up, you will see the NAV rising. So, let’s say, we are at an NAV of Rs15 after a year and the market sinks 15%. The fund manager will sell equity and buy bonds to secure the highest NAV till then.

In a market that has no volatility, the product will work because the NAV will go up only in a linear manner. But real life is less neat. Each time the market falls and your allocation in debt rises, the reverse allocation to equity may not happen when markets recover. Remember, the debt part of your portfolio is holding bonds that ensure the highest NAV at maturity. So over a period of time, your portfolio in equity may become smaller and smaller and would move towards a pure debt fund.

Says Shashi Krishnan, chief investment officer, Bajaj Allianz Life Insurance Co. Ltd: “Depending on how much the markets fall, and at what point during the tenure, we reserve the right to exit the stock market and keep all the money in debt.” Given the “go-anywhere” mandate—or 0-100% allocation in equity, debt and money market instruments—that the policy document allows, these funds can technically move fully into debt and stay there, making your Sensex-linked dream just that. A dream.


Says Manish Kumar, head (investments), ICICI Prudential Life Insurance Co. Ltd: “Since these have exposure to both equity and debt asset classes, under normal circumstances, the returns can be somewhere between what a debt fund and an equity fund would give.” In the long term, that’s between 6% and 15%.

Has the product started looking less happy? There’s worse to follow.

Costs and more
The guarantees come at a cost making these products some of the most expensive in the market. Also, the guarantee frees them from the cost caps introduced recently.

You need to pay an annual cost for the guarantee, apart from the fund management fee. ICICI Pru’s Pinnacle offers the highest NAV in the first seven years of the policy and charges 0.10% above the fund management charge of 1.35%. Result? Your returns are about 3 percentage points lower—a 15% return will mean a post-cost return of 12%.

These plans also look like investment plans masquerading as insurance plans. The sum assured is capped at five times the premiums (on a premium of Rs1 lakh, you will get a maximum sum assured of Rs5 lakh). Also, most of these are available for a term of up to 10 years. An insurance cover is necessary for most people (other than Shah Rukh Khan and Sachin Tendulkar, who do need insurance) till they retire. So a 10-year policy with just a Rs5 lakh cover looks very much like an investment product under the garb of an insurance policy.

Worse, this guarantee is available to you only on maturity, usually 10 years. If you die during the term, your nominees will get the prevailing value of the fund—the guarantee on NAV works only if you live till the end of the policy.

Should you buy?

Guaranteed products work for investors who do not want a risk to their principal amount, but would like a small upside of equity. If you are looking for a Sensex-linked return kicker with zero risk, please get real. Such products do not exist.

Says Manik Nangia, corporate vice-president and head (product management), Max New York Life Insurance Co. Ltd: “It is possible that the implications of such structures are not well understood. We believe this can create unreasonable expectations. For instance, the allocation to debt can increase substantially when the market falls, while the consumer may have bought on the premise of participating in equity. Besides, there is criticism that this technique necessitates selling equity holdings when the market falls and that is opposite to the principle of value investing for long-term returns.”

Says Veer Sardesai, a Pune-based financial planner: “There is lack of transparency on asset allocation and the insurer doesn’t guarantee that he would stay invested entirely in the stock market during the term. So, we don’t know what high is guaranteed.”

If you are a risk-averse equity investor and can lock in money for 10 years, look at index funds to ride the Sensex and Nifty.