The hidden costs of index ULIPs: Why passive funds still charge active fees

livemint.com:

Index funds have garnered significant attention in the world of mutual funds, largely due to their low-cost structure. Recently, life insurance companies have also ventured into this space, offering index funds as part of their unit-linked insurance plans (ULIPs). However, unlike traditional mutual funds, these index funds in ULIPs maintain the same high cost structure as actively managed funds, which, combined with other product charges and tracking errors, significantly diminishes policyholder returns when compared to the underlying index.

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An index fund typically tracks a broad index, like the Nifty50 or NiftyNext50, without the need for an active fund manager to pick stocks. However, some index funds are designed with specific rules—known as «factors»—such as value, momentum, or growth, to create a more concentrated form of index investing. These are referred to as rule-based or factor funds.

Life insurance companies offer ULIPs, which combine market-linked returns with life insurance coverage. Much like mutual fund houses, life insurers offer a range of funds for policyholders to choose from, including some newer rule-based index ULIPs. These include offerings like the Nifty Alpha 30, Nifty 500 Momentum 50, and Nifty SmallCap 250 Quality 50 Index, among others.

The stock market contains a variety of indices, and life insurance companies can create new fund offerings by selecting certain stocks from a broader index, using algorithms to do so. These are known as rule-based or factor funds. Think of them as customized index funds, where a set algorithm—not a fund manager—selects stocks.

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