Sensex at 28,000: Will the real Indian stock market investor please stand up?

bubbleVivek Kaul

I have cooked my own food for over 12 years now. Over the years, as boredom from cooking on a daily basis has set in, the quality of what I cook has deteriorated. These days the food I cook is just about edible.
Given this, I like to watch some mindless television while eating. This ensures that I don’t pay attention to what I am eating and as a result, don’t end up cribbing to myself. What works best in this scenario, especially during lunch time, are business news channels.
If you are the kind who still watches them, you would know that a major part of the day on these channels is spent in trying to figure out which way the stock market is headed. The anchors of these channels talk to so called “experts” who give their “
gyan” on why they feel the market moved the way it did, and which way they think it’s headed in the future.
More often than not these experts are optimistic and keep telling us that the market is only going to go up from here. Nevertheless, as you and I know that is not how things always turn out. It is especially interesting on days the markets rise, to see these experts thump their chests and tell the viewers “I told you so!”
The reasons for their optimism vary from day to day. It can be low inflation on one day and the hyperactive Modi government on another. On days they run out reasons they like to tell us the “India growth story is still intact”. Come rain or sunshine, these experts always have their reasons ready. And that makes it great fun to watch.
(I have to confess here that I have this recurring dream where I have been invited to a studio of a business channel and am asked “Mr Kaul, which way do you think the stock market is headed?” And I look write into the eyes of the anchor and tell her “Mam, it’s headed only one way and that’s up”.
“Why do you say so?” she asks, with her eyebrows fluttering. And I reply: “The whole country of the system is juxtaposition by the haemoglobin in the atmosphere because you are a sophisticated rhetorician intoxicated by the exuberance of your own verbosity.”)
Jokes apart, these experts especially the Indian ones, never really tell us the real reason behind the Indian stock market going up.
Between April 2007 and October 2014, the foreign institutional investors(FIIs) made a net purchase(gross purchase minus gross sales of stocks) of Rs 2.06 lakh crore in the Indian stock market. During the same period the domestic institutional investors(DIIs) made net sales of Rs 22,715 crore.
Things get more interesting once we look at the numbers between September 2008 (the month the current financial crisis started) and October 2014. During this period, FIIs have made a net purchase of Rs 2.76 lakh crore. In the same period, the DIIs made net sales of Rs 95,219 crore. These data points tell us very clearly who is really driving up the Indian stock market. In the aftermath of the financial crisis breaking out in September 2008, the developed nations of the world led by the United States and United Kingdom carried out quantitative easing or printed money and pumped it into their respective financial systems, to keep interest rates low.
This was done in the hope that at low interest rates people would borrow and spend more, and all the spending would help revive economic growth. What happened instead was that large financial institutions managed to borrow money at low interest rates and invested it in financial markets all over the world. This has driven up stock markets all over the world, including the BSE Sensex.
The inflow of foreign money has been particularly strong this year. As Abhishek Saraf and Abhay Laijawala of Deutsche Bank Market Research point out in a recent report “On a year to date basis too, India has witnessed the highest FII inflows into equities at ~US$14billion.”
This has helped the Sensex rally by more than 33% since the beginning of this year. But the interesting thing is that DIIs have continued to stay away. Since the beginning of this year they have made net sales of Rs 27,241.5 crore.
Nevertheless, October 2014 has been an exception to this, with the DIIs making a net purchase of Rs 4,103 crore. This is for the first time since August 2013, when the net purchase of the DIIs was higher than that of the FIIs. In fact, FIIs made net sales of Rs 1683 crore during the course of the month.
The question to ask here is why have the DIIs not invested anywhere as much as the FIIs have in the years since the financial crisis broke out. The answer lies in the fact that DIIs (primarily insurance companies and mutual funds) ultimately invest money they collect from the retail investors.
The retail investors had bailed out of the stock market lock, stock and barrel, in the aftermath of the financial crisis. They haven’t returned since. A major reason for the same was the fact that insurance companies sold expensive unit linked insurance plans (or Ulips) to retail investors.
Many agents promised investors that their money once invested in the stock market would double in three years. That clearly did not happen, and individuals who had bought Ulips essentially went around footing the bill for the high commissions that insurance companies paid their agents. And this ended up giving the stock market a bad name.
Also, many retail investors started entering the stock market only in late 2007, when the market was already at a very high level and ended up making losses. As Deepak Parekh said in a speech last week in Mumbai “Retail investors tend to enter stock markets on the highs and lose confidence on the lows.”
Further, DIIs represent only the indirect participation of the retail investor in the stock market. What about the direct participation? This is very minuscule. As Parekh pointed out “On the retail side, the picture is grimmer. Direct participation of retail investors in Indian capital markets is 1.4% of the population compared to China at 9.4%, UK at 16% and US at 18%.”
Or as maverick investor Shankar Sharma once told me during the course of an interview “The Sensex is just a two square mile phenomenon — Fort to Nariman Point. That is about all that is interested in the Sensex.”
Parekh in his speech estimated that after excluding promoter shareholding and the retail segment, which do not have too much liquidity, FIIs dominate close to 70% of the market. What this clearly tells is that it is the FIIs have used the “easy money” provided by the central banks of Western countries to drive the Indian stock market, and, in turn, have benefited the most from it as well. This has also helped the BSE Sensex cross the level of 28,000 points more than a few times in the recent past.
Given this, the next time you see an Indian expert trying to give you reasons on why the stock market is rallying, try and tell this to yourself: “he knows not what he is talking for he is on television.”
To conclude the question to ask here is whether it is time to allow big provident funds like the employee provident fund, the government provident fund and the coal mines provident fund to invest a part of their corpus in the stock market? This will be one way of ensuring that some regular Indian money also keeps coming into the stock market and foreign investors are not the only ones to benefit. And that is something worth thinking about.

The article originally appeared on on Nov 11, 2014

For every rupee sold by Indians, foreigners have invested Rs 6.2 in the stock market

indian rupees Vivek Kaul 
The BSE Sensex has been flirting with new highs these days. It touched an intra-day high of 22,030.72 on March 18, 2014. The Sensex had touched similar high levels in January 2008, more than six years back. It is interesting see how the Indian investors and foreign investors have behaved since then.
The foreign institutional investors (FIIs) have bought stocks worth Rs 1,56,517.42 crore between January 2008 and March 14, 2014. During the same period the domestic institutional investors have sold stocks worth Rs 25,184.3 crore. Given this, for every rupee worth of stocks sold by the Indian institutional investors, the foreigners have invested Rs 6.21 (Rs 1,56,517.42 crore divided by Rs 25,184.3 crore) in the Indian stock market.
Why has that been the case? There are number of reasons for the same. The investment bank Lehman Brothers went bankrupt in September 2008. This unleashed the current financial crisis. In order to tackle this crisis, the Western nations have run an easy money policy, which includes maintaining low interest rates as well as printing money, in order to get their economic growth going. The idea being that people will borrow and spend money at low interest rates, which will benefit businesses and in turn lead to economic growth.
The easy money policy has allowed the big institutional investors to borrow money at very low interest rates and invest it in financial markets all over the world. That is the major reason behind foreign investors investing Rs 1,56,517.42 crore since January 2008, in the Indian stock market.
In fact, things get even more interesting if we consider data from December 2008 onwards, given that the western nations started to run an easy money policy towards the end of 2008. Since December 2008, the foreign investors have invested Rs 2,59,354.8 crore in the Indian stock market. During the same period the domestic investors have sold stocks worth Rs 96,244.8 crore.
What explains this contrast? The easy money policies explain one part of the argument, they clearly do not explain why Indian domestic investors have stayed away from the stock market. Lets look at some data that might throw up some clarity.
Data provided by the Association of Mutual Funds in India(Amfi) shows that in January 2008, around Rs 1,72,885 crore was invested in equity mutual fund schemes. It is important to understand here that the money was invested in equity mutual fund schemes and not necessarily stocks. A mutual fund scheme that invests more than 65% of the money that it manages in stocks is categorised as an equity mutual fund scheme. Money invested in equity mutual fund schemes formed around 32% of the total money managed by mutual funds at that point of time.
In February 2014, the amount invested in equity mutual fund schemes stood at Rs 1,57,227 crore. Money invested in equity mutual fund schemes formed only around 17% of the total money managed by the mutual funds.
In January 2008, the amount of money managed by mutual funds stood at Rs 5,48,064 crore. This has since then gone up to Rs 9,16,393 crore. Hence, mutual funds are clearly managing more money than they were a little over six years back, but the amount of money they manage under equity schemes has clearly come down.
Since August 2009, the Securities and Exchange Board of India (Sebi) made it mandatory for mutual funds not to charge any entry load on mutual fund schemes. Prior to this, out of every Rs 100 put in by an investor in any equity mutual fund scheme, Rs 2.25 used to be charged as an entry load and passed onto the agent as a commission.
With almost no commissions on offer, agents stopped selling equity mutual fund schemes to retail investors. Hence, the amount of new money coming into the equity mutual funds and through them to the stock market has come down dramatically. What has also not helped is the fact that investors have redeemed their investments in equity mutual fund schemes big time since January 2008.
Investor interest has also gone away from unit linked investment plans (Ulips) offered by insurance companies. Ulips are essentially investment cum insurance plans which offer the investor an indirect option of buying stocks among other things.
In the bull market that ran from 2004 to 2008, banks and insurance agents mis-sold Ulips big time given the high commissions on offer and in a large number of cases promised to double the money invested in three years. By now a large number of Ulip investors have figured out that the only person who gained in case of Ulips was the insurance agent. Hence, investors have stayed away from investing in Ulips and through them into the stock market.
Given this, unlike the foreign investors, the Indian institutional investors have found it difficult to raise money to invest in the stock market over the last six years. And that explains to a large extent the fact that foreign investors have invested a lot of money in the stock market, whereas the Indian investors have stayed away.
The article originally appeared on on March 19, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Hari Narayan ran Irda like an insurance lobby


Vivek Kaul
What is it with outgoing Indian bureaucrats and their tendency to become remarkably honest about all that is wrong with the Indian system, once they retire?
The latest to join this long list is Jandhyala Hari Narayan, the recently retired chief of the Insurance Regulatory and Development Authority(IRDA) of India, the insurance regulator. In an interview to the 
Mint newspaper, a few days back, Hari Narayan said “I think there is a philosophical problem.I think the regulators are probably closer to the industry than they ought to be.”
While I don’t know whether its a philosophical problem, it definitely is a problem. Much through Hari Narayan’s stint at IRDA, the regulator acted more like an industry lobby, rather than an institution which was also supposed to protect the interests of those buying insurance policies.
Allow me to elaborate.
During Hari Narayan’s reign IRDA put out advertisements urging people to buy unit linked insurance plans (Ulips). Ulips are essentially investment plans carrying a dash of insurance. Ulips used to pay very high commissions to insurance agents, which has since fallen. So to put it in another way, they are high cost mutual funds, which also provide you with some insurance.
Now which regulator puts out advertisements asking people to buy the product that it regulates? This would be like the Securities and Exchange Board of India(Sebi) putting out advertisements asking people to buy mutual funds. Or the Telecom Regulatory Authority of India, the telecom regulator, putting out advertisements, asking people to buy mobile phone connections.
And if that wasn’t enough, Hari Narayan also cleared highest NAV guaranteed plans without understanding the damage they would cause to those investing. These plans were typically 10 year plans. Some of these plans guaranteed the investor the highest NAV achieved during the first seven years of the plan. Some others guaranteed the highest NAV achieved during the entire duration of the plan.
What is ironic is that these investment plans had the flexibility to invest up to 100% of the money they collected in the stock market. And how can the stock market and any guarantee go together? Those who still believe in this need to be reminded of this institution called Unit Trust of India (UTI), which tried to provide investors with assured returns by investing in the stock market and failed spectacularly.
Hari Narayan conveniently blamed the clearing of this product on the actuary at IRDA at that point of time. “I think there was a process of understanding even at Irda and I don’t think the then member actuary was really so clearly focused on policyholders’ welfare as he ought to have been. So it took some time to really figure it out,” he told 
Mint. Why clear a product which you don’t understand? I am amazed that this is how decision making happens at one of India’s foremost regulators.
What is interesting is the way these plans were sold by insurance companies. These plans were made to look like 100% stock market products. They gave an impression that the money collected would be invested in the stock market and the money would continue to remain invested in the stock market. And the highest NAV that the plan achieved during the course of its tenure would be paid out in the end, irrespective of the prevailing NAV.
Let me explain through an example. Let us say initially the NAV is Rs 10. The money collected is invested in the stock market. The value of these investments rises by 50% and the NAV increases to Rs 15 (Rs 10 + 50% of Rs 10). After this the stock market starts to fall and by the time the policy matures the NAV has fallen to Rs 12. So as per the terms of the policy the highest NAV of Rs 15 would be paid out to the policy holders.
This of course meant that the insurance company would have to pay out Rs 3 from its own pockets. Now it need not be said that insurance companies are in the business of making profits and not losses. So the way these plans were really structured was different. In all likelihood these plans would have a higher exposure to equity initially and gradually move the investments into debt as the date of maturity neared. Also, gains made on investing in stocks would be regularly booked and moved to debt, so as to ensure that the NAV did not rise beyond a certain level. But this is not how the product was sold.
This was misselling at its best. And this was not the only form of misselling that happened. There were other standard techniques of misselling. Investors were promised that there investment would double in three years. There was also a lot of churning. Investors were made to stop their investment in Ulips after three years and the new premium was directed into newer Ulips. This was done because Ulips paid higher commissions during the first two years. Irda turned a blind eye to all this.
And the results of all this misselling are now coming out. Those who invested in Ulips are now finding out a few years later, that instead of their investments doubling, they are still losing money on it. This is primarily because a lot of money they invested went to pay commission to insurance agents. In fact payments made to insurance agents have been more than what the Insurance Act permits. “These payment are more than what the (Insurance )Act permits,” Hari Narayan told 
The losses have led to more people surrendering their insurance policies before they matured. As a recent report in 
The Hindu Business Line points out “According to IRDA (Insurance Regulatory and Development Authority) data, in fiscal 2012 life insurers had to pay Rs 71,208 crore on account of surrenders (withdrawals), of which, LIC paid Rs 41,531 crore and private sector insurers, the balance. In fiscal 2012, ULIPs accounted for 68 per cent of the total surrender for LIC, and 97 per cent of the total for private insurers.”
So between April 1, 2011 and March 31, 2012, policy holders surrendered insurance policies worth around Rs 71,000 crore. And a major portion of this was Ulips.
An earlier report in the 
Mint points out that investors may have lost more than Rs 1,56,000 crore in the seven period ending on March 31, 2012, due to misselling by insurance companies. And that is clearly a lot of money. Hari Narayan was in-charge of IRDA during much of this period. What these losses also do is that they make the so called small or retail investor wary of anything to do with the stock market. And that is not a good sign in a developing economy like India which needs a lot of money to keep growing.
To give Hari Narayan due credit during the second half of his tenure he did try and set things right by cutting down Ulip commissions and also tried to do a thing or two about misselling. But by then the damage had already been done. It was a case of too little too late. The insurance companies simply moved towards selling traditional insurance policies, where the commissions continue to remain high. The guaranteed NAV plans continue to be sold.
Also, the bigger problem with Ulips remain. An investor still cannot figure out which is the best Ulip going around given that returns across different Ulips remain incomparable.
Hari Narayan has been replaced by T S Vijayan, a former Chairman of Life Insurance Corporation of India. Predictably the insurance companies have upped the rhetoric with one of their own taking over as the regulator. As a recent story in the
 Business Standard pointed out that insurers felt that there was no need to ban highest NAV guaranteed products. The story quoted a chief executive of a private life insurance company as saying “The products, per se, do not have any fundamental problem. The problem is it these have a tendency to be mis-sold, since the customer does not understand market fluctuations could be risky. Hence, disclosures should be made clearer, rather than banning the product.” As the American writer Upton Sinclair once wrote “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
Given this, I expect the misselling in insurance to continue.
The article originally appeared on on February 26, 2013


(Vivek Kaul is a writer. He tweets at @kaul_vivek) 


Why LIC chief is more worried about the agents than policyholders

Vivek Kaul
Seth Godin, one of the leading marketing gurus of the world, talks about the rock n roll band The Rolling Stones in one of his blogs.
Keith Richards (guitarist and vocalist of The Rolling Stones) tells a great story about Charlie Watts, legendary drummer for the Stones. After a night of drinking, Mick (Jagger, the lead vocalist of The Rolling Stones) saw Charlie asleep and yelled, “Is that my drummer? Why don’t you get your arse down here?” Richards continues, “Charlie got dressed in a Savile Row suit, tie, shoes, shaved, came down, grabbed him and went boom! Don’t ever call me “your drummer” again. You’re my … singer. No drums, no Stones,” writes Godin.
As The Rolling Stones wouldn’t have survived without Charlie Watts and his drums, no insurance company can survive without the policyholders who go out there and buy there products. Then they pay premiums which keep these insurance companies going.
But the Life Insurance Corporation(LIC) of India clearly doesn’t seem to believe in this. In an interview to the Daily News and Analysis (DNA), D K Mehrotra, the Chairman of LIC, said that the Insurance Regulatory and Development Authority (Irda), the insurance regulator, should rethink its plan to reform the traditional products offered by insurance companies.
For the uninitiated insurance companies in India largely sell two kinds of insurance plans. These are the unit linked insurance plans(Ulips) and the other are the endowment plans. The endowment plans sold by insurance companies are typically referred to as traditional plans.
In an endowment policy the policy holder is insured for a certain amount. This amount is referred to as the sum assured. A portion of the premium paid by the policy holder goes towards this insurance cover. Another portion helps meet the administrative expenses of the insurer. And a third portion is invested by the insurance company on behalf of the policy holder. The investment is largely made in debt securities which are deemed to be safe. (For a more detailed discussion on endowment plans click here).
The interesting thing is that The Insurance Act 1938 allows insurance companies allows insurance companies to pay as high as 35% of the first year’s premium as commission to insurance agents. This means for every Rs 100 that is paid as premium in the first year as high as Rs 35 could go to the agent as a commission.
The insurance regulator, Irda, over the last few years has cracked the whip on the commissions that insurance companies can pay to their agents for selling Ulips. Ulips are essentially investment plans masquerading as insurance.
The fall in commission on Ulips has led to insurance companies and agents suddenly discovering ‘good’ attributes in endowment plans given that they continue to pay high commissions. In the days when commissions on Ulips were high LIC and its agents had taken to pushing Ulips in a big way.
As Mehrotra told The Economic Times in September 2011 “Earlier, we had Ulips and traditional products at a 60:40 ratio, which has now reversed.” This ratio has further fallen and the ratio of sales for LIC between traditional plans and Ulips is now 80:20.
Irda in its proposed reforms for traditional products plans to cut down on commissions on offer to insurance agents, as it had done in case of Ulips earlier. And if that happens sales of traditional plans which now get in the bulk of the premium for LIC will be impacted. “.If the existing ones(the products i.e.) have to be withdrawn, we will be at loss,” Mehrotra told DNA. As has been clearly seen in the case of Ulips, lower commissions have impacted sales big time. And that will happen with traditional plans as well once the monstrous commissions are cut.
This is something that Rajeev Kumar, chief and appointed actuary at Bharti Axa Life Insurance told sometime back. “if you cap charges and you apply the same logic as unit linked then these plans will have same fate as unit linked plans which means commissions will go down, if commissions will go down, distributors will not be interested and distributors are not interested, the market share of these products will go down,” he said.
The Committee for Investor Awareness and Protection had envisaged an era of totally commission free financial products in its reports a few years back. As the report of the committee had pointed out “All retail financial products should go no-load by April 2011. The pension product in the NPS is already no-load. Mutual funds have become no-load with effect from 1 August 2009. Insurance policies need to remove the bias towards selling the policy with the highest commission. Because there are almost three million small agents who will have to adjust to a new way of earning money, it is suggested that immediately the upfront commissions embedded in the premium paid be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011.”
While the commissions on almost every other financial product have fallen to 0%, the insurance companies continue to offer high commissions to their agents, at the cost of the policyholder who in the process gets lower returns.
But low commissions are not in the interest of the insurance companies neither is it in the interest of the government which needs LIC to buy the shares of public sector companies that it is trying to sell to bring down the burgeoning fiscal deficit. Other investors are not interested in buying shares being sold by the government.
When Mehrotra was asked by DNA in another interview if there was pressure from the government to buy shares “No, at least I have not experienced it. There is no pressure on me to buy any particular share,” he said. Being a government employee we couldn’t have expected him to say anything but this. A recent report in The Economic Timessays that the LIC lost over Rs 5,000 croreby buying public sector shares of ONGC, NMDC and NTPC.
Given this the last thing on the minds of Mehrotra and LIC is the policyholder who has bought the LIC policy. As Godin wrote in his blog “Who’s playing the drums in your shop?” In case of The Rolling Stones it was Charlie Watts. For LIC its clearly not the policyholder. 

The article originally appeared on on December 13, 2012 

(Vivek Kaul is a writer. He can be reached at
[email protected]

Why you should not believe LIC’s bulls**t on Ulips

Vivek Kaul
Patrick Jake O’Rourke an American political satirist and journalist recounts a very interesting story in his book Age and Guile – Beat Youth, Innocence and a Bad Haircut.
It was 1969 and O’Rourke had applied for a fellowship. To get the fellowship he had to clear an interview at the Ohio State University English Department.
On reaching there he was asked “Which literary critic has had the most profound influence on your thinking?”
“I could not think of the name of a single literary critic,” recalls O’Rourke in the book. But of course he had to say something, which he did.
Henry David Thoreau,” was his answer to the question. Thoreau was an American poet, author and philosopher.
“Henry David Thoreau wasn’t a literary critic,” the board interviewing him rightly pointed out.
“His whole 
life was an act of literary criticism,” retorted O’Rourke.
He got the scholarship. “Well, it was 1969. 
Bullshit was an intellectual mainstay of the era,” he writes.
Bullshitting or BS as it is more euphemistically referred to as is a very important part of life in general and corporate life in particular. If one needs to survive and get out of tricky situations, learning how to give bullshit as well as decipher it is, very important.
Take the case of the decision made by the Life Insurance Corporation of India to relaunch Unit Linked Insurance Plans (Ulips) after a gap of nearly two years. Ulips are essentially high cost mutual funds masquerading as insurance. A major part of the premium collected through selling Ulips is invested in the stock market.
As the
Business Standard reports today “The intention is to take advantage of the bullishness in the stock market. Sources familiar with the developments said this would also help the insurer attain its target of Rs 45,000 crore of new premium income collection in 2012-13 and increase its market share.”
Now this is what one would call bullshitting. Giving out every reason for a decision except the real one. And what is the real reason for LIC suddenly deciding to launch Ulips?
The real reason for LIC suddenly deciding to launch Ulips is the disinvestment programme of the government. At the beginning of the year the government had targeted to raise Rs 30,000 crore by selling shares of public sector enterprises to investors.
But now that number will have to go up due to several reasons. The government has been spending money at a faster rate than it had envisaged. The fiscal deficit during the first six months of the year had already reached 65% of the targeted amount of Rs 5,13,590 crore.
The tax collections have slowed down and only 40% of the projected amount has been collected during the first six months of the year.
Also, the auction of telecom spectrum through which the government had plans of raising Rs 40,000 crore has turned out to be a damp squib. The government could collect only Rs 1,707 crore or around 4.3% of the targeted amount.
This means a short fall of nearly Rs 38,300 crore which will now have to be most probably made up through the disinvestment route. Hence, a total of around at least Rs 68,000 crore (Rs 38,300 crore + the earlier target of Rs 30,000 crore) will now have to be raised through disinvestment.
This means the government will have to sell shares of a lot of public sector companies to investors. But the question is whether investors have an appetite for it?
And the answer is no given the current mess that the government is in. This is where LIC comes in. India’s biggest insurer bought a major part of the recent sale of shares of Hindustan Copper Ltd by the government and thus rescued its disinvestment.
And this is something that LIC is expected to do over and over again till March 31, 2012 and help the government meet its disinvestment target. Recently the government allowed LIC to own up to 30% of a company against the earlier stipulated limit of 10%.
Hence, LIC will end up buying shares which the government wants it to buy rather than the shares it should be buying from the point of view of generating good returns for its investors. Given this, LIC needs money which has the mandate to be invested in equity. The premium that it collects through its traditional endowment plans needs to be invested in safer avenues like government securities and loans raised by the best companies.
This money cannot be invested in the stock market. The money raised through selling Ulips can be invested in stocks. And that is the kind of money that LIC needs right now. Thus the decision to launch Ulips after a two year hiatus.
Also the last three months of the financial year are the best time to sell Ulips or any other kind of insurance plan, given that this is the time most people get around to doing their tax planning and investing money in tax saving avenues, insurance is one of which.
Ulips were the wonder drug for the insurance industry for a very long period of time until investors started figuring out that the only person gaining from the Ulip was the insurance agent. Also, the clamp down by Insurance Regulatory and Development Authority (IRDA) of India, the insurance regulator, on Ulip commissions, pushed insurance agents towards traditional insurance plans which continue to pay a high commission.
Now Ulips are all set to act as the wonder drug for the government. The money raised by LIC by selling its new Ulips is likely to be invested in the shares of the public sector units the government plans to sell to meet its disinvestment target.
It’s a win a win proposition for everyone. The government gets its easy money. LIC gets new premium on which it charges a management fee to manage that money. The insurance agent makes the commission. The only person losing out, as always, is the person buying the Ulip, who ends up indirectly owning shares that no one else in the market wants to buy. But then who was bothered about him anyway? He could always be bullshitted and told it was all for his own good.
Today’sEconomic Times says that the LIC lost over Rs 5,000 crore by buying public sector shares of ONGC, NMDC and NTPC.
But DK Mehrotra, chairman, LIC had told Business Standard on an earlier occasion “Ulip has its own advantages, it gives you fast returns.” But the question Mehrotra does not answer is faster returns for whom? It clearly isn’t the Ulip investor.
Hence, dear reader it is important that you decipher this bullshit and allocate your hard earned money somewhere else. 

The article originally appeared on on December 4, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])