What has happened over the past few months is that unit-linked plans have participated in the broad-based rally in the market to deliver high returns. However, these returns are certainly not an index of what investors can expect in the future.

For instance, mutual funds posted spectacular returns in the various bull runs in the 1990s and their net asset values zoomed. When the rally died down, the erosion in value was equally swift. Few funds managed to recover from their battered NAV levels.

Till such time they prove that they can deliver the goods even under tough market conditions, investors will be better off opting for plans that invest primarily in debt, which have lower downside risk.

To maximise returns even during such bullish phases, it is imperative that investors time their entry and exit from the markets. As far as stocks go, returns tend to be compressed over a short timeframe. (To illustrate, the Sensex has put on nearly 60 per cent in a span of six months this year.)

Staying put too long in a unit-linked insurance plan that focusses on equity may deplete returns if market mood turns negative. This implies that investors should deftly switch between schemes within a plan to get the biggest bang for their buck. For instance, investors who want to lock in to the gains on the equity portfolio can switch whole or part of their exposure to the debt-oriented plan.

In case of survival up to maturity, the value of the fund is paid out. Therefore, the risk here is transferred to the policyholder and nothing is guaranteed. So, if the fund value falls below the amount invested, the policyholder will receive a lower amount.

Various charges are levied on such plans. They either lead to a deduction from the investment amount that is brought in or are adjusted by liquidation of units. In both cases, returns are affected. Typically, charges are high in the initial two years before they taper off and stabilise for the rest of the plan's term.

This would mean that the effective amount available in the first two years would be 80 per cent of what has been invested. Thereafter the investible surplus is higher. In the current bull run, the high returns mask the charges levied. But if returns drop to single-digit levels, investors will feel the pinch.

One also needs to consider the deduction that will be made if one opts for life cover. If it happens to be on a one-year renewal basis, a higher amount will be deducted as mortality charges. This is in contrast to what one pays in a pure term plan under which premiums are fixed on the basis of the mortality risk at the time of purchasing the plan.

Let us take a closer look at charges and fees. There is an initial administrative charge deducted every month from units. This could be very high, around 15 per cent per annum in the first year, around 7 per cent per annum in the second and around 2-3 per cent per annum thereafter.

Suppose you buy a policy wherein the annual premium works out to Rs 10,000, in the first year, Rs 1,500 would be deducted towards administrative charges, Rs 700 in the second year and around Rs 300 from the third year. These rates vary from company to company but are more or less in this range.

There is an investment management charge too, which would vary according to the fund selected; for instance, an equity fund would attract a higher investment management fee of around 1 per cent per annum compared with a debt fund that might attract a fee of 0.25 per cent.

So continuing with our example, a sum of Rs 100 would be deducted from the annual premium if an equity fund is opted for. Next, companies charge an annual administration charge. In case of some companies this charge is a flat rate, say, Rs 20 per month. In the case of others, this charge is again a percentage of net assets for each fund.

Finally, there is a deduction for risk cover. This goes towards contribution to the sum assured or the life insurance cover. It is based on mortality rates as calculated by actuaries. For comprehensively summarising our example, we will assume the age of the male policyholder to be 30 years and sum assured Rs 100,000.

Of a total premium of Rs 10,000 paid in the first year, Rs 1,500 is deducted towards initial administration fees, Rs 100 towards investment management fees (assuming the fund opted for is equity) and Rs 240 towards annual administration fees.

That leaves a balance of Rs 8,160 in the first year. Out of this, Rs 169 would be deducted towards risk cover. Hence, finally Rs 7,991 would be invested in the fund.

In the second year, the figure would stand at Rs 8,791 and third year onwards, around Rs 9,191 for the term of the policy. So, every time you make your premium payment, only a part of it is actually invested in the fund of your choice.