The popularity of unit linked insurance plans (ULIPs) has increased considerably over the past few years. Not surprisingly, this has coincided with the attractive returns posted by the stock markets over this period.

ULIPs, being market-linked, mirror to a large extent, the gains/losses of the stock markets. That is why it's important for investors to evaluate a ULIP portfolio objectively before considering investing in it.

ULIPs have been marketed as instruments that basically are 'a mutual fund and more'. In this note we evaluate the portfolios of some leading ULIP plans on offer today by applying yardsticks that we apply to portfolios of mutual fund schemes. Of course, there is no denying that ULIPs are inherently different from mutual funds as they offer a life cover also.

Nevertheless, in our view, such a study will help individuals select ULIPs that suit their profile and needs better.

For our evaluation, we have considered the Aggressive ULIP plans from four life insurance companies whose portfolios were available to us (as on March 31, 2006). We would have liked to include more insurers, but lack of data and inconsistency in presentation of data forced our hand on that front.

1. Allocation to Equities The allocation to equities differs across the four companies under study. True to its investment mandate, HDFC Standard Life (HDFCSL) had invested 100.0% of its corpus in equities. Kotak Life Insurance (KLI) had invested 62.2% of its corpus in equities against a mandate to invest upto 80.0% of its assets in equities.

The other two companies, ICICI PruLife and Aviva, have adhered to the limits set out for them with 94.8% (mandated to invest upto100% in equities) and 80.8% (mandated to invest up to 85%), respectively.

In terms of market capitalisations, we have observed that the ULIPs under review invest predominantly in large cap companies. However, Aviva is an exception; it invests liberally in mid caps. This can be gauged from the fact that close to half of its equity portfolio (i.e. approximately 42%) is invested in midcap companies.

This may not be the most prudent feature of a ULIP that is investing individuals' insurance monies. Investors would do well to appreciate that mid cap stocks typically tend to be high risk -- high return investment propositions vis-�-vis their large cap peers.

All four insurers under review have invested in line with their investment mandates. However, it is apparent that investment mandates for the Aggressive ULIP plans vary significantly across insurers. On one hand, you have a HDFCSL, which is necessarily invested upto 100.0% in equities, while on the other hand there is a KLI that can invest up to 80.0% in equities.

Another insurer -- Birla Sun Life Insurance Company (whose portfolio for the 'Flexi Save Plus endowment plan' we failed to acquire) can invest only upto 35.0% of assets in equities in its Aggressive ULIP plan. This kind of disparity in "similar-natured" ULIP offerings from various insurers underscores the need for investors to make an informed decision while buying ULIPs.

Opt for a plan that suits your risk profile and expectation of return over the life of the policy.

2. Top 10 Stocks

At Personalfn, we have always maintained that a diversified stock portfolio should hold no more than 40.0% of its assets in the top ten stocks. This helps the portfolio counter turbulence in stock markets more effectively. Concentrated stock portfolios can be sitting ducks during stock market volatility and their wayward performance can be very upsetting for investors.

With respect to holdings in the top 10 stocks, HDFCSL is well diversified. It holds 42.7% of its assets in its top 10 stocks. However, in terms of number of stocks held, it remains the most concentrated with a total of 34 stocks in its portfolio.

ICICI PruLife had the most concentrated portfolio with 50.4% in its top 10 stocks. The total number of stocks it held (51 stocks) was the highest in its peer group.

KLI comes across as the most diversified ULIP portfolio with only 25.7% of its total holdings in the top 10 stocks. Likewise, Aviva with an allocation of 28.0% is well diversified. Given that KLI and Aviva have an equity cap in the 80%-85% range, their top 10 stock holdings are very well diversified.

One problem we faced while evaluating portfolios is lack of relevant data points. For instance, something as relevant and important as the net assets/corpus was not mentioned for all ULIPs. As a matter of fact, apart from ICICI PruLife no other ULIP had this information.

3. Sectoral Allocation

In terms of sectoral allocation, ICICI PruLife emerges as the most concentrated one with 65.0% of its assets in the top 5 sectors. So too is the case with HDFCSL which holds 64.2% of its assets in 5 sectors.

Both Aviva and KLI fare better as compared to HDFCSL and ICICI PruLife with 41.6% and 30.6% of assets in the top 5 sectors respectively. Again, this comparison has to be seen in light of the lower equity allocation for both these insurers.

Like with stock allocations, we believe that sectoral concentration can expose a portfolio to above-average volatility. While such a strategy can help the ULIP clock attractive returns during a market rally, it is likely to expose investors to higher volatility when the markets witness a downturn.

With respect to the concentration in the portfolios, insurance seekers need to appreciate that insurance companies invest monies from a very long-term perspective; they are able to therefore take, say a 10-year call or a 20-year call on a company or a sector. Since their inflows are committed and 'locked in' they are able to invest with greater freedom and also not excessively worry about near term volatility.

4. Fund Management Charges (FMC)

Charges play an important role while calculating the returns on a portfolio - higher the charges, lower is the value of the investments. Over the long term (over 15 years), charges have the potential to significantly impact the returns generated by the ULIP portfolio.

HDFCSL with an FMC of 0.80% surfaces as the most cost effective ULIP. ICICI PruLife (FMC 1.50%) fails to redeem itself on this front. KLI (FMC 1.50%) and Aviva (FMC 1.00%) with additional expenses in the form of a buy-sell spread fare poorly compared to the others alongside it. Simply put, the buy-sell spread is the difference between the buying price and the selling price at which the life insurance company buys and sells its units.

In addition to FMC, ULIPs also levy administration charges. Here too, HDFCSL with charges of Rs 180 per annum (pa) emerges as the clear leader. ICICI PruLife (Rs 720 pa) and Aviva (Rs 779 pa) fare poorly on this front.

For KLI, the administration charges are levied as a percentage of the annual premium- for the first year, the charges are 7% for premium upto Rs 20,000 pa and 3% for that portion of premium exceeding Rs 20,000 pa. Second year onwards, these charges drop to 4% (for premium upto Rs 20,000 pa) and 2% (for premium exceeding Rs 20,000 pa). KLI too fails to impress on this parameter.

5. Policy Returns

HDFCSL with a return of 86.7% for FY06 (financial year ending March 2006), towers head and shoulders over the competition. It has also managed to outperform its benchmark, the BSE 100 (up 66.2%), by a wide margin. Such a performance is not surprising given that the policy invests its entire corpus in equities vis-�-vis peers.

ICICI PruLife too fared well on this front with 68.2% returns over FY06, although it just about managed to outperform its benchmark, (BSE 100).

Kotak with 49.2% returns over the said period fared poorly as compared to its peers as well as its benchmark, the S&P CNX Nifty (up 64.6%). One reason for the under-performance could be the 'controlled' equity exposure (62.2% as on March 31, 2006) as compared to its mandate (up to 80%).

Aviva (61.1%) managed to post reasonable returns vis-�-vis peers. Despite our best efforts, we failed to solicit information about the policy's benchmark from the insurance company.

Our evaluation of ULIP portfolios throws up some interesting learnings:

1. The quality of data and its presentation need to improve significantly, if investors, both existing and potential, are to be able to study portfolios and make intelligent decisions.

2. ULIP portfolios need to be disclosed regularly. The reason you are seeing only four ULIP portfolios is because others either don't disclose it or disclose it only 'selectively'.

3. By and large ULIP portfolios are well diversified in terms of stock allocations, however we would like to see more diversification at the sectoral level. As we have learnt with mutual funds, one without the other is of little use during a market downturn like the one we are witnessing at present.

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