Higher lock-in for ULIPs seen helping tax funds

Higher lock-in for ULIPs seen helping tax funds

New Delhi: Tax funds are poised to improve market share as the proposed hike in lock-in period for rival unit-linked insurance plans (ULIPs) make mutual funds the most liquid equity tax-saving instrument.

However, a large scale shift from ULIPs to mutual funds is unlikely immediately as advisers continue to promote insurance products which earn double-digit commissions on at least the first premium as against about 50-100 basis points from funds.

India’s insurance regulator is considering a plan to increase the lock-in period for investments under ULIPs to five years from three years now, said R. Kannan, member actuary of Insurance Regulatory and Development Authority.

“Probably in another one month we will do this job," he said, adding the change should make ULIPs a better long-term investment vehicle.

However, the step would reduce liquidity of ULIPs, which analysts see working in favour of tax planning mutual funds, popularly known as equity linked savings scheme (ELSS), that will continue to offer a three-year lock-in.

“ELSS products will become more competitive in a way, in terms of returns, costs and holding period," said Chintamani Dagade, senior research analyst at Morningstar India, adding that such funds will attract more inflows.

“That’s a good thing to happen to (fund) industry," he added.

ULIPs, which combine investment and insurance, have emerged as a popular investment product offering market-linked returns.

These plans, launched in 2001, have been the favourite of insurance seeking investors who wanted to ride the stock market, and among insurance advisers for their higher commissions.

This was evident from the success of the insurance industry when firms rode a surge in the equity market until 2007 as household savings were increasingly diverted into ULIPs, swelling insurers’ new business premiums.

However, of late, the insurance regulator has initiated steps to moderate the rush to sell ULIPs. Earlier, on 20 August, it directed insurers not to charge any fees on surrender of such plans after five years, and in July it imposed a ceiling on some charges that ULIPs would levy from October onwards.

A higher lock-in will reduce their attractiveness, at least among savvy investors, but reversing the trend will not be easy for mutual funds, particularly after a recent regulation that restricts them from paying upfront fee to agents.

“Mainly because of the commission issues, ULIPs will be targeted by distributors... it’s a sellers’ market," said Dagade.