Mutual fund companies have had an excellent run rolling out new schemes periodically over the past few years. And, increasingly, even sectoral/thematic funds are being lapped up by investors given the possibility of a high-risk-reward scenario.

Indeed, in the last 12 months, the gross sales of sectoral/thematic funds, including from NFOs (new fund offers), have been a whopping ₹219,765 crore, the highest among all fund categories.

Now, life insurance companies, too, have jumped into the bandwagon. Unit-linked insurance plans (ULIPs) came out with their own ‘NFOs’ in the past year or so, seeking to ride on the mutual funds juggernaut by offering active and passive products to investors via factor-driven or index-based offerings.

However, sector funds are also making their way via ULIPs. Recently, Canara HSBC Life Insurance rolled out a new manufacturing fund as an investment option for its ULIP and the scheme is open till November 21.

We look at some of the features of this product and the charges involved.

Specifically, ULIPs carry higher charges in the initial years, have lock-in periods, and do not have as transparent disclosures as mutual funds do.

Combining life insurance and investments

Insurers such as PNB MetLife, Max Life, Bajaj Allianz Life, and Ageas Federal Life, among others, rolled out NFOs based on momentum indices, small-caps and multi-caps. Some even started balanced advantage funds. These offerings were available with active and passive strategies.

Canara HSBC Life Insurance, as mentioned earlier, is offering a new manufacturing fund benchmarked to the Nifty India Manufacturing fund.

This new fund is offered under its Wealth Edge ULIP. There are 10 fund options (large-cap, debt, emerging leaders, balanced, and so on) available under the Wealth Edge ULIP, including the new manufacturing fund.

Investors must note that insurance companies offer these ‘fund’ options as part of their ULIP product line. In ULIPs, you invest in a fund indirectly. So, a policy allows you to invest in an underlying equity strategy: index, factor-based, active market-cap-based, etc. However, there can be many ULIPs offered by the same insurer that invest in these very funds. There is no one-to-one investing like in the case of mutual funds where each scheme has a unique portfolio.

Therefore, the ULIP product itself would be different, and the funds (NFOs and existing funds) would be offered as options for policy buyers.

Like a mutual fund NFO, the ULIP fund option is also offered at ₹10 per unit.

And these ULIPs themselves have an insurance component and an investment portion.

Wealth Edge offers limited and regular premium payment options. The sum assured is a minimum of 5-7 times the annualised premium depending on the age of entry (less than 50 and 50-70, etc.), premium paying term and so on, for regular payment plans. There are loyalty additions made to the fund after the sixth policy year.

If a policyholder pays all the premiums for the full term, the mortality charges are returned by adding them to the final fund value. Fund switches are available with some conditions.

Charges, lock-in and taxation

A ULIP has multiple charges associated with it. So, there would be charges related to policy administration, mortality, premium allocation, riders, premium redirection, switching, and a few other heads. There would also be GST levied.

For the Canara HSBC Wealth Edge ULIP, policy administration charges range from 7-9 per cent for the regular payment option, depending on the amount of annualised premium paid (₹1.15 lakh to ₹10 lakh and above). From the second to fifth year, the charges are in the range of 5.5-6.5 per cent. Subsequently, it is 1 per cent till the tenth year and zero after that.

Mortality charges for a male are in band of ₹0.647-3.105 per ₹1,000 premium paid depending on the age of the insured (20-50).

Fund management charges are 1.35 per cent for the India Manufacturing fund.

After taking these charges into consideration, gauging the final returns post these charges is challenging.

Also, with higher charges, the chances of outperformance over standard indices or benchmarks becomes extremely challenging.

Finally, for any premium of more than ₹2.5 lakh per year on ULIPs purchased after February 1, 2021, gains are taxed at 12.5 per cent beyond ₹1.25 lakh if the underlying investment is an equity-oriented instrument, going by the recent July 2024 budget announcements.

What should investors do?

The usual advice of separating investment and insurance always remains relevant and important.

Equity ULIPs, more so those with sectoral/thematic offering, are risky. With higher charges, investor returns get eroded.

The new India Manufacturing fund NFO of Canara HSBC Life Insurance will invest 60-100 per cent of its portfolio in companies that are into manufacturing and industrial activities. The remaining 0-40 per cent will be deployed in money market instruments, liquid funds, short-term investments and fixed deposits.

A combination of demographics leading to strong local consumption, export demand, global companies looking to de-risk their supply chain from China dependence and government push in terms of providing incentives have brought back the vigour in the theme.

The share of manufacturing in India’s gross value added (GVA) is all set to grow from 15 per cent currently to 20 per cent by 2030. In actual dollar terms, manufacturing GVA is set to rise 2.8 times from $453 billion in FY23 to $1.28 trillion by FY30.

But the manufacturing theme is best played via mutual funds, active or passive.

ULIPs also have a 5-year lock-in, which is another disadvantage, if an investor wants early exit, especially when the underlying is risky like a thematic/sectoral fund.

Multiple charges
A ULIP has multiple charges related to policy administration, mortality, premium allocation, riders, premium redirection, switching. GST would be levied as well.
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