On Turning a ULIP into a TULIP

In sixteen hundred and something, the world went bananas about tulips. What ensued was an enormous boom in the tulip market, with species selling for thousands of gilders, and with futures quoted for shoots which were planted or even about to be planted. Murders were commited, all for tulips. Nobody knew this at the peak of the mania, but a virus had hit the tulip plantation industry, resulting in tulip species emerging in all kinds of exotic colour combinations, which were so intriguing, that it led to the mania. Now this virus was a one time thing, it didn’t happen after that. So, as the exotic species and their shoots died, it became apparent to the market that there would be no more exotic specie supply, and a bust followed. Fortunes got wiped out. Suicides resulted. Nevertheless, a tulip remains what it is, a serene flower, adding harmony to the environment, currently fairly priced.

Now what’s a ULIP, or a Unit-Linked Insurance Policy? As the name suggests, it’s an insurance policy, which is linked to units (of equity / debt). When I entered the world of investing, my office got swamped with ULIP salesmen, and I invariably ended up buying 4 ULIPs from various companies because of the excellent sales pitch, and because I didn’t know any better. The killer and sealing remark in the sales pitch was that what form of investment could not be confiscated by any authority, were one to land in trouble or jail? The answer – an insurance policy. And what better an insurance policy than one that is linked to the markets?

Each ULIP has a lock-in, typically 3 – 4 years. So there I was, locked-in with products I knew nothing much about. Hmmmm ULIP – sounded like tulip. I thought to myself – “What if I can find a way to get maximum benefit from these ULIPs? I’m stuck with them anyways.” And my mission statement became – “I’m gonna turn these ULIPs into tulips.” Later, when I had succeeded in this, I even concocted a new name for them, i.e. TUrbo cum Leveraged Insurance Products or TULIPs.

As I set about doing research on ULIPs, all the negatives came up first. Apart from the fee structure being irritating, each premium had a huge additional deduction to go with it. One ended up investing only 80 – 85% of what one paid as premium. The rest went to the insurance authorities. After all, they would charge for an insurance cover. Then, the salespeople held all my passwords in their hands, as per the power of attorney I had signed while investing. They switched in and out of equity at all the wrong times, and my investments were taking a hammering. Then, while switching, one could only catch the end of the day NAV etc. etc. etc.

Slowly, I invited each salesperson for tea in the office. This was much before the financial meltdown, and the merchant banker / investment sales agent was still king, whereby the investor was starved for new investment products. After boosting up their egos, I pulled each login ID and password out of their clutches, and immediately went online to effect a password change. OK, I was no longer under their control.

I noticed that switching between equity and debt was free of cost. What if I switched 50 times a year, not that I was going to, but what if I did? Free 24 times, Rs. 100 per switch after that. Hmmmm. Any direct equity investment would have resulted in brokerage generation, and in ULIPs, there was no brokerage generation. The fund house put up the money for whatever brokerage was generated by ULIP clients. They were probably their own brokers, so they didn’t end up losing much anyways. So, how much was I saving on brokerage per switch. Typically, 0.75% of the total investment if I looked at a complete buy and sell transaction, i.e. switch in to equity and switch out of equity. So, how much money would I save in brokerage if I switched a corpus of Rs. 1 million 50 times over? Rs. 3,75,000/-. Hmmm, sizable. A trader with a high turnover didn’t need to trade directly, he could do it through ULIPs. And the trader would be in and out of the market with one click, there was no need to sell or buy 20 or more different scrips. Still, one would only get the end of the day NAV. The bottom-line was that the trader would save huge amounts on brokerage with this kind of turbo ULIP switching.

What further made this avenue attractive for the trader was the fact that ULIPs did not require one to pay any short-term capital gains tax because of the lock-in. Wow. This was big. So, If I made a million on a million in less than one year, I got to keep all of it, and would not have to part with 15% as short-term capital gains tax. Such tax-saving leverages the portfolio, because one invests the tax-saving back into the market, and future gains are compounded owing to a larger initial investment corpus. In fact, the brokerage saving component was adding to this leverage too in the same way.

So there I was. I had put my investment philosphy regarding ULIPs together, and had actually turned them into TUrbo cum Leveraged Insurance Products, or TULIPs. After recovering my losses and gaining some, I soon got bored, and when the lock-ins ended, I got rid of the TULIPs.

What remains with me today is that this was my first victory in the world of investing, a feeling of harmony that never fails to energize me, just as the mere thought of a field of colourful tulips would energize / harmonize the mind


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