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Sample this: In the last three years, debt products have returned around nine per cent annually, while benchmark indices gave around 4.50 per cent. Over the past two years, debt products gave nearly 10 per cent while benchmark stock indices gave a meagre three per cent.
In the last one year, equity performance has improved, that is, the benchmark indices have returned 20 per cent and around 5.50 per cent in the last six months. Compared to this, debt market products have returned 9-10 per cent and 4.50-5 per cent, respectively.
Given the uncertain equity markets over the past four years, investors have lost confidence in the asset class. At the same time, higher returns (double digit) from debt products in this period saw investors park money across these category. While fixed deposits and debt funds have been seeing investments flow in for some time now, insurance industry experts are seeing investor favour debt-focussed unit-linked insurance plans (Ulips) in the past few months.
Given that Ulips as a product category has not seen the kind of traction it used to pre-September 2010, insurers are favour investors buying debt Ulips. According to a leading insurance broker, some companies are planning to launch a couple of pure debt-focussed Ulips to tap the sales growth from this product.
Insurers say there is scope for good returns from debt Ulips at this point in time (for 8.50-9 per cent return) due to falling interest rates and rising bond yields. Also debt products are a tad less uncertain than equities, investors anyway favour them. Money is expected to flow into debt for another year or so. Typically, insurers offer equity-focussed funds, debt-focussed funds and balanced funds in Ulips.
However, financial planners do not favour investing in Ulips as investment and insurance needs should be keep separate. Says Aurangabad-based chartered accountant and financial planner, Anirudha Hatwalne, "Ideally, insurance products cannot serve investment purpose. And I will definitely not suggest investing in debt Ulips."
If an investor is conservative, not disciplined about regular investment and hence wants to combine insurance with investment, Hatwalne suggests endowment plans. "Though, such investors will also be better off with investing a smaller portion in equity for growth and the rest in debt funds," he says.
Agrees Bangalore-based certified financial planner Anil Rego. He suggests debt-oriented balanced funds for higher returns compared to Ulips. Or, a combination of fixed deposits and debt mutual funds may also work for risk-averse investors.
"Given ulips' cost structure, investing in debt-focussed ones will not give the kind of returns that help can recover the cost of investment and earn more than inflation over the long-term," points out Rego. Let's assume inflation will remain at eight per cent over the next 10 years and the fund management cost in Ulips is 1.50 per cent. He says debt Ulips will eat into your corpus while equity may be able to return two to three per cent more than inflation. Hence, avoid debt Ulips.
However, there are many other costs, such as premium allocation charge and policy administration cost to name a few, attached to Ulips. And if all the frontal charges are taken into account, despite the cap on these charges, Ulips work out to be expensive.
