Saturday, October 07, 2006

Which charges have the biggest impact on returns

I have been trying to measure the impact of the following charges on overall returns
  • Loading Charges
  • Admin Charges
  • Fund Management Charges

I have used the following three plans in my comparision.
  • Bajaj Allianz Unit Gain Plus
  • HDFC UnitLinked Endowment Plus
  • ICICI Lifetime Plus

Loading Charges
HDFC - 60% first year
Bajaj- 24% first year
ICICI- 25% first year

Admin Charges
HDFC - Rs.240 per annum
Bajaj- Rs.240 per annum
ICICI- Rs.720 per annum

Fund Management Charge
HDFC - 0.80%
BAJAJ- 1.75%
ICICI- 1.50%

For an Investment amount of Rs.24,000 per annum assuming an annual return on investment of 10%, the following is how the returns look like

Investment Time Frame - 5 Years
Best Returns - BAJAJ (7% more than ICICI)
Second Best - HDFC (2% more than ICICI)
Last - ICICI

Investment Time Frame - 10 Years
Best Returns - HDFC (5% more than ICICI)
Second Best - BAJAJ (3% more than ICICI)
Last - ICICI

Investment Time Frame - 15 Years
Best Returns - HDFC (8% more than ICICI)
Second Best - BAJAJ (1% more than ICICI)
Last - ICICI

Investment Time Frame - 20 Years
Best Returns - HDFC (12% more than BAJAJ)
Second Best - ICICI (0.5% more than BAJAJ)
Last - BAJAJ

Investment Time Frame - 25 Years
Best Returns - HDFC (16% more than BAJAJ)
Second Best - ICICI (2% more than BAJAJ)
Last - BAJAJ

For an investment time frame of 5 years, Bajaj Allianz Unit Gain Plus seems to offer the best returns. For any investment time frame of 10 years to 25 years, HDFC seems to offer the best returns.

Regarding charges, on the long run, Fund Management Charges have the most significant impact on performance. You will notice the gap in returns between HDFC and other widening as time passes(inspite of 60% loading charge). This is because it has the least FMC. Even ICICI which offer slightly better fund FMC than Bajaj has been able to surpass the returns of Bajaj Allianz Unit gain plus on the long run.

Fund Management charges are the most important charges for long term investments. Chose a ULIP product that has the least fund management charge to maximize your returns.


the_blue_quill said...

Can you pls explain how mortality charges are calculated on a ulip? I have put in 25ks each in sbi unit plus 2 regular and icici life super. After reading various articles on ulip's i have lost all confidence on my investments, yet i plan to stay in for the mandatory 3 year period.

Raj Gopal Vuppala said...

For understanding how mortality charges are calculated, you need to first understand the term "Death Benefit" in ULIPS. Most ULIPS can be categorized into two groups based on Death Benefit.

1) Death Benefit = Sum Assured + Value of Investments
In this case, the mortality charges are based on your age and sum assured. You will have to pay these charges through out the term of the policy.

2) Death Benefit = Higher of (Sum Assured or Value of Investments)
In this case, the mortality charges are calculated by substracting value of your funds from sum assured. If the Value of your Investments are more than Sum Assured, then no mortality charges will be deducted.

The way ULIPS are structured, you pay significantly higher upfront loading charges. Since you have already paid these higher loading charges, it is better for you to just stay invested in the ULIPS you have invested. I would advise redeeming your funds ONLY if you don't want the additional life cover offered by ULIPS.

Anonymous said...

Hi Raj,

Thanks for visiting my blog and IM'ing me. Sorry, I was bit occupied and forgot to change the status.

Thanks for visiting.

Sumant Sarkar said...

one question sir... the FMC of ULIPs seem to be around 1%, whereas equity MF annual expenses are around 2.5%.
What do you think about this difference ? For long terms (20 years or more) a ULIP may beat MF even with the same market performance due to this difference. Though ULIPs have huge entry loads compared to 2.25% load of equity MF, the effect of loads
tend to get negated by the FMC difference. What do you feel ? I have been having this dillemma for a while. Of course, MFs have other advantages over ULIP which cannot be always quantified.

Raj Gopal Vuppala said...

You are right. Purely based on the charges structure, an investment in ULIPS(inspite of high loading charges) will yield more returns than MF's "provided" you are invested for long term and also the assumption that both of these offer the same returns.

But the main advantage of MF's are you can easily move your funds from a "non-performing" MF to a "well performing MF". With MF's you can also decide how aggressive you want your investments to be (by deciding how much exposure to midcaps you want). Very few ULIPS offer midcap funds as of now.

Anonymous said...

Pls. explain what is your hypothesisi to calculate 15 yrs. and 20 yrs. return

Hemant said...

Hi Raj..
The raiting which you have shown in regards with the returns from different ULIPs, Could you please verify it... As I am not completly agree with your ratings .....

Thanks if you can answer my question....

Raj Gopal Vuppala said...

I am not sure I fully understood your question. The simplest way to evaluate which ULIP has least charges is to compare your net returns on the illustration of each of these plans.


Anonymous said...

what are different types of chargers applied in ulips? can you please tell me briefly about them.

thanking you if you answer me please..........

Raj Gopal Vuppala said...

Please refer to the following post I made which refer to the most common charges in ULIPS.

Venkat said...

Very useful blog... please continue posting on this blog and help people guide themselves investing.

sham shete said...

you are giving useful information to individual investors like us.
Thanks a ton to you.

Keep writing...