ULIPs are No Good

I am 35 years old and my priority is to invest in such a way that I can get a good amount after 15 years. My investor manager asked me to start SIPs in funds like DSPML T.I.G.E.R , Reliance Growth , Reliance Diversified Power , HDFC Equity , SBI Magnum Contra, Kotak Lifestyle (Rs 2,000 per month in each). He also asked me to invest in Kotak Smart Advantage ULIP (Rs 1 lakh yearly). He suggested that whatever we deposit in SIPs, from that amount we will withdraw Rs 1 lakh every year & put it in the same ULIP under 100 per cent equity for at least for 5 years. Is this proposition right? Are the funds and ULIP selection good? After 15 years, will I get a substantial amount?
—Amol Lambe

Let us start with numbers. If you invest Rs 12000 per month and your funds generate 20 per cent per annum, you would be able to create a corpus of Rs 1.10 crore in 15 years time. That is indeed a huge amount. But we would not recommend you to take the ULIP route to achieve this. ULIPs have high initial charges which would eat up a major chunk of your investment in the initial years. For instance, in Kotak Smart Advantage the first year premium would not get allocated at all for investments. This premium (according to the product brochure) would be used to provide you a guarantee of 100 per cent of first year premium if the policy term is 5 years. That means if you invest Rs 1 lakh nothing would actually be invested in equities in the first year. You can now yourself decide if this makes a good investment. That implies a first year charge of 100 per cent!

This article was originally published on May 19, 2008.