Simply buying a ULIP or a mutual fund does not get you returns, no matter what the past history of return on the fund was. In fact never look at the past history. There are two circumstances when you have a higher possibility to earn money on ULIPs. The two conditions are

• When you buy at the launch of the ULIP or mutual fund scheme and keep it for a few years subject to the essential condition that the fund is reasonably well managed and there are no major market crashes during your holding period.
• In case you are entering a fund a few years or even months, after the launch and purchasing units at market price, you stand a chance to make money only if you know how to time your entry and exit to the fund.

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Attention all Managers/SBAs/Development Officers/CLIAs train your agents this week on the subject of this article.

Let me explain this with a few illustrations. Purely as an example we take the case of Bajaj Allianz Life’s Pure Stock Fund. No particular reason to take this fund. Any other ULIP or mutual fund will display the same characteristics as the one we have taken to explain.

Example 1

Let us suppose that the desired target rate of return is 10 % CAGR. If you had purchased the units at the reported price of Rs. 13 on 21 July 2006 (reported starting date) and sold at the reported price of Rs. 45 on 23 March 2020, you would have earned a CAGR of 9.36 %, (which is less than 10 %).

Example 2

Suppose you had purchase the units of this fund on 3 June 2014 (reported NAV Rs. 33.23) and sold them on 23 March 2020 (reported NAV Rs. 45), you would have a CAGR of 6.4%.

Example 3

On the other hand suppose you had purchased on 3 June 2011 at the reported NAV of 21.47 and sold on 3 June 2016 at the reported NAV of 44.40, your CAGR would have been 15.39 %

What do these three examples tell us? Well three very important lessons on ULIPs and mutual funds.

Lesson 1

First it is the timing of the purchase and selling that is important. An investor should be able to pick the timing of when to buy and when to sell. Like in Example 3, the investor bought at a time when the NAV was about to go up substantially. The NAV of Rs. 21.47 more than doubled in about 5 years. This could not have been foreseen, it is only a matter of luck. But there are a few good market players who get their timing right about 50 % of the time. No one gets it right all the time. The same luck does not hold good in Examples 1 and 2. In fact, as Example 2 shows, a wrong timing brings down the CAGR to just 6.4 %. Had the investor purchased on 3 June 2013 or sold on 3 June 2019, the CAGR would have been around 15 %. The timing of buying and selling is crucial to earning money on a ULIP or a mutual fund. This is how risk manifests itself to the investor.

Lesson 2

Holding a ULIP for a long period of time is no guarantee that you will earn a lot of money. In Example 1, the holding period was about 14 years. This is as long a period as any one would recommend as long term holding. But the CAGR was less than 10 %. Whereas in Example 3, we saw that in a period of about 5 years holding, the investor earned a CAGR of 15.39 %. Holding for a long term is no guarantee for higher returns. In the long run volatility kills returns on investment.

Lesson 3

Lost value is rarely recovered for the investor. Once the NAV crashes, as it has in March 2020, (and likely to crash further in the next few weeks), it is very difficult to get back to substantial earnings on the investment. Supposing a person invested Rs. 13 on 21 July 2006 when the Fund was launched, and now the NAV has crashed to Rs. 45. Now suppose that the investor expects at least a CAGR of 10 %, 5 years from now, on his original investment of Rs. 13, the NAV will have to grow at 14.62 %. This is a tall order, knowing that the fund since inception has given a CAGR of 9.36 %.

What do you do with ULIPs or MFs whose NAV has crashed?

A very difficult question to answer. You need to understand the markets well as a prerequisite to providing an answer. However a substantial view can be developed from a few simple calculations, along with a judgement of the likely price movement in the future period. Taking the current example as explained in Lesson 3 above. An investor who invested Rs. 13 on 21 July 2006, finds that his or her CAGR is 9.6 % and wants at least a CAGR of 10 %, 5 years from now. In the remaining period of 5 years the CAGR should touch Rs. 89.02, so that the investor gets at least 10 % CAGR for the period 2006 to 2025. The CAGR in the period 2020 to 2025 (the remaining holding period), should therefore be 14.62 %.

Judging the market is not everybody’s cup of tea

The judgement to employ here is will that happen? This is where acumen matters. If one has to only hope, acumen is not required. But if money is important, and hard savings are to protected, a conscious decision has to be taken. My own judgement of the market is that in most cases this may not be possible.

Firstly markets will always remain volatile, whether falling or rising

Firstly when the market recovers, the recovery in any financial market (whether equity or debt) will not be a smooth straight line graph, proceeding at a steady rate upwards, year after year. The financial markets are volatile, whether they are in general moving up or down. Volatility kills return as I have shown in other articles on this blog.

Secondly the mountain may be too steep to climb

Secondly, the desired CAGR in a short period of time will always be high. As in our example above it is 14.62 % over a period of 5 years. If we reduce the period to less than 5 years, the desired CAGR in the remaining period, whether it is 2 years of 3 years, will be astronomically high.

Thirdly in the long run all assets fetch the same rate of return

Thirdly, the best that most investors can hope for on mutual funds in the coming years will be approximately in the same range had they invested their money in post offices, banks or traditional life insurance. One of the tenets of economics is that in the long run all assets give roughly the same rate of return. For if in reality there is actually an asset in the short run, that gives very high returns, then all money will flow in the direction of such an asset. In the long run the demand and supply equilibrium will come into play and the asset will give the same return as any other asset.

Risky assets (ULIPs, MFs, etc.) are not for the long term

You do not earn more money in the long run on ULIPs or MFs. It is your timing that is important. In the long run all assets earn the same maximum possible return, though some risky assets may earn a very low or negative return. Stay invested in ULIPs and MFs, if you know how to play the markets yourself, do not depend on advisors. Explain risks to your customers. Do not get into the trap of returns.

Sell Risks Not Returns
Because Returns Are Uncertain, While Risks are Certain

Look out for articles in the immediate future on ULIPs and how to sell them. Follow ethically correct practices to earn your customer’s trust and confidence and to establish yourself as a successful agent.

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