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ULIP Bonus: Is it a Bonanza?

ULIP '71, the second largest scheme from UTI stable has announced a 1:10 bonus. Though a maiden bonus, it comes after a dry spell of three years. Indeed a celebration time for investors. But does it really mean something meaningful.

It's making news again. The country's largest mutual fund house, the Unit of Trust India, announced a bonus issue of 1:10 for its scheme, Unit Linked Insurance Plan 71 (ULIP 71). This second-largest fund of UTI -- after US-64 -- has decided to give its maiden bonus on July 25, 2002. But, hello, before you break into a dance, let me tell you something -- a 1:10 bonus means you effectively get 1 unit for every 10 units held, but the NAV gets reduced and the value of your investments remains the same. Now, as dividend payouts are no more tax friendly, it is a tax friendly dividend in the garb of bonus for investors. ULIP allows investors the benefit of a life insurance and accidental insurance cover upto Rs 30,000. It also entails a 20 percent tax rebate under Section 88 of the IT Act on the amount of investment in a fiscal. That apart, you are also assured a bonus of 5% and 7.5%, respectively, on maturity of the 10- and 15-year plan. However, a premature withdrawal will attract a penalty of 1.50%.

When the fund was launched in 1971, the maximum amount for investment in both the plans was pegged at Rs. 60,000 spread over the entire term, which was later on enhanced to Rs 75,000. However, starting August 1, 2002, this limit has been raised to Rs 2 lakh, i.e. Rs 20,000 for 10-year plan and Rs 13,333 for the 15-year plan per annum. The fund started declaring its NAV on a weekly basis as against the administered pricing prior to this. Also, the fund introduced an entry and exit load of 1.50% (irrespective of maturity) for both plans. To discourage redemptions, a lock-in period of minimum seven years was introduced for the 10-year plan and 10 years for the 15-year plan. Recently, the scheme did away with the entry load. Going forward no exit load will be charged on redemptions occurring on or after the maturity of plans.

The fund's performance especially since it went open-end in September 2000 has nothing to write home about. Though less severe than the carnage in its tech-loaded balanced peers, its almost 50:50 debt equity allocation has resulted in an annualised 4.80% loss since its revealed its NAV 2000. Overall, if the downside in volatile times has been limited, so has been the upside in the bullish phase as well.

Coming to the bonus issue, the fact that 1:10 bonus comes after a dry spell of three years is certainly inspiring for investors. Because after making an uninterrupted streak of dividend payouts in its long history, the fund did not make an income payout after 1998. And the dividend paid till then was compulsorily re-invested in the fund and investors got additional units in lieu of the dividend. And so will be the case with the bonus as well. So investors should rather cheer about getting something, even though its means nothing worthwhile.