It’s a sham! How to spot the Ulips sold as mutual funds

livemint.com:

insurance plans (Ulips). Take, for instance, the case of Tushar Jejani, 24, who works as a senior financial analyst at a multinational company in Hyderabad. He was approached by his bank’s relationship manager for an upcoming new fund offering (NFO).

Since Jejani had known the manager for a long time, he decided to invest ₹75,000 in the NFO, which he presumed to be a mutual fund offering. He was asked to pay ₹75,000 annually for the next five years. Jajani came to know later that he had been sold an Ulip, something that he did not bargain for.

“It was only when I read the policy documents that I realized what the NFO really was," said Jejani, whose money is still stuck in the insurance-cum- investment plan of the bank’s insurance arm. To be sure, Ulips combine two products—insurance and investments. The premium amount paid by a policyholder is divided between insurance and investments after first deducting various costs.

For instance, there is a mortality charge that is associated with insurance. Insurers deduct all such charges from the premium before investing the balance amount in equity, debt, or hybrid fund categories. So, for every ₹100 paid as premium, about ₹10 goes into the insurance and other costs .

The remaining is invested in a Ulip fund from which fund management charges (FMC) are deducted. FMC is capped at 1.35% of the premium amount. The policyholder can switch between the various investment funds offered by the company but cannot port to funds offered by other companies.

Each Ulip offers a fixed number of switches that can be done in a year for free. While Ulips are not pure mutual fund products, a lot of investors do think that it is. This confusion arises when the advertisements put out by insurance