Why To Worry About 25% Of ULIP Money In G-secs?

What are ULIPs?

ULIP funds are market-linked insurance products that combine the benefit of insurance and investment under a single plan. There are various types of unit linked investment plan and the premium you pay is primarily divided into two parts. While the first part goes towards the cost of life cover, the second part is invested in debt, equity, or hybrid funds. As of now, it permits a minimum investment of 80% in equities.

ULIPs are considered as one of the best investment options due to following benefits:

• Flexibility to chose and switch between funds

• Complete transparency in structure, charges, and features

• Additional covers can be taken by opting for riders

• Various fund options to suit both risk takers and averters

• Different premium paying frequencies

• Dual tax benefits available under sections 80C, 80D, and 10 (10 D) 

However, the latest draft guidelines from the Insurance Regulatory and Development Authority of India (IRDAI) attacks the very first feature of the above mentioned list and restricts choice by mandating that at least 25% of ULIP funds be invested in central government securities (G-secs).

Rationale Behind Proposing New Guidelines

The proposal of 25% investment in G-Sec has a noble cause of financing long-term infrastructure projects, thereby providing much needed boost to government’s infrastructure projects. However, it could have repercussions on ULIPs, given that this product has witnessed many ups and downs in the past. Investors looking for pure equity funds may not be interested to continue with ULIPs, as the proposed recommendation will force them into a product that is likely to generate less than 8% returns. A 25% investment in government securities does limit the risk but this may have other repercussions, as many policyholders looking for pure equity funds may not be interested to continue.

Effect of This Proposal on ULIPs

ULIPs were never on the top of investors’ list and if the draft proposal is accepted, it would further slow down its growth prospects. As part of ULIPs, insurance companies offer four main fund options— debt, balanced, secured, and equity funds. If each fund has to meet the terms with the mandated 25% investment in government securities, there will be no equity funds. As a result, many investors will not prefer buying ULIPs and insurers will find it tough to sell the product to investors wanting 100% equity exposure. By making a 25% exposure to government securities mandatory, limited investment options will be available.

Conclusion

The IRDAI proposal has been drafted keeping in mind the interests of the government and not the consumer. Mandatory investment in government securities takes away the customer’s choice and it could hurt fund returns as well. Those looking for pure equity funds for higher returns might not be able to do so if the proposal is accepted. Ideally, a customer should be allowed to make an investment in funds of their choice. Forcing them to invest in certain types of securities is not a good practice. In addition, there is no need to have a separate 25% investment clause when there are traditional plans that offer the guaranteed return option.