The client is 55 years old

She does not have a regular source of income, so investing for a regular income was her top priority

Her only investments are in fixed deposits (FDs)

She will inherit a huge sum of money at the age of 60 years

She is not very literate in matters of investment and finance

She is not very liquid (i.e. has less cash)

It is apparent from the client's age and investment profile that a Rs 500,000 ULIP, which was invested completely in equities, was the last thing she needed. In fact, there was no reason to recommend anything even remotely risky. While ULIPs could be suitable to individuals based on their risk profile and investment objectives (your financial planner is best placed to assess the suitability of a ULIP), in our client's case there was little scope for a ULIP to add any significant value to her portfolio. Add to this the fact, that being relatively illiquid, she could not afford to pay the premiums for the following years.

Let us examine why ULIPs were unsuitable for her.

1. To begin with, she was not explained what ULIPs are all about; this is not surprising since a lot of clients we know have bought ULIPs without appreciating how they can contribute to their investment/insurance objectives. Given that she was not very well versed even with the basics of investment and insurance, we believe selling her a Rs 500,000 ULIP amounted to professional misconduct of the highest order and coming from a reputed bank, this is even more alarming.

2. Now selling a ULIP to someone who does not need it is one thing, and selling her a Rs 500,000 ULIP is another thing that ranks as even more atrocious. We fail to understand how a Rs 500,000 ULIP could be of any assistance to a 55-Yr old lady, who has no source of income and who is just looking to remain invested in a low risk avenue that provides a regular income until she turns 60 years when her father's sizeable inheritance will come her way.

3. While ULIPs can add value to the individual's investment/insurance portfolio, two points are necessary to achieve this; a) the ULIP should be for a long enough tenure and b) ULIP expenses should be competitive, else for someone who does not need the life cover, mutual funds are a better option.

Confused about ULIPs, download the free ULIP guide

It is apparent from our client's details that she did not qualify on the tenure parameter to justify a ULIP. With a 5-Yr time frame before she inherited her father's wealth, she just did not have the minimum number of years necessary to wipe out the heavy initial expenses on the ULIP. ULIPs incur high expenses (sometimes as high as 60 per cent of the premiums) in the initial years; so an investor is not going to earn a (significant) return on the ULIP in the initial years until the high expenses are recovered. Performance of stock markets (in the case of equity-heavy ULIPs) play a critical role in recovering the expenses, but at the time of opting for a ULIP there is no way to ascertain how stock markets are going to fare over the short-to-medium term (don't believe your agent if he claims to know better, he is lying).

So for our client, a high-expense investment like ULIP, which is a suitable proposition over the long-term, was a loss-making proposition from day one, because she was not interested in an investment that was longer than 5 years (i.e. until she turned 60 years old). She simply needed a one-time low-risk interval investment (providing an income) that would serve her well over a 5-Yr tenure. And since she was not in a position to pay the premium even in the second year, effectively she lost out on her capital as well. Not to mention that there was no monthly income being generated by the product!

Bank washes hands off the mis-selling
When Personalfn met the client and learnt about the mis-selling of the ULIP, we urged her to take this up strongly with the bank, which sold her the ULIP. To her dismay, the bank shirked responsibility over the mis-selling and professed helplessness in view of the fact that the agent (who mis-sold the ULIP) had been transferred to another city! To those who agree with the bank's excuse, we would like to state that any selling (or mis-selling) that happens on the bank's premise is the bank's business whether that person is the bank's employee or a third-party employee or whether he is still with the bank or has been transferred or has quit the bank altogether. If the bank disagrees with what we have said, then they should put up a notice to that effect in the branch.

How we would have done it differently?
As financial planners, a big advantage with this particular case was the clear-cut time frame (i.e. 5 years) that the client had in mind. She just wished to be invested in an avenue for 5 years that would generate regular income; after 5 years she would inherit her father's money. Also it was abundantly clear to us from our interaction with the client that she had a lower risk appetite. In view of these two points, we would have recommended that:

1. the client invest in an FMP (fixed maturity plan) over shorter tenures and roll over at the end of the tenure. To provide for a source of income she could opt for the dividend option. Being market-linked FMPs provide an opportunity to generate higher returns (than FDs) depending on how debt markets are placed at a point in time.

2. A structured mutual fund product would have been suitable for the client. These mutual funds are predominantly invested in debt to provide capital preservation; the smaller equity component (usually 15-20 per cent of assets) provides for capital appreciation. These funds, although not capital-guaranteed investments, offer low-risk investors the opportunity to clock higher returns than debt funds at marginally higher risk. Again, she could opt for the dividend option.

3. The Post Office Monthly Income Scheme is an option for investors looking for regular income. Among all fixed income investment options, POMIS is one of rare avenues that assures a monthly income. We would have recommended that the client make the most of this opportunity to earn an assured monthly income.

4. She could enhance her investments in FDs. Many companies (like HDFC [Get Quote] for instance), have a monthly income option on their FDs. The client could invest in FDs of such companies to avail of the monthly income option.

In our view, investing in ULIPs was a pointless exercise that should never have been recommended to the client. It neither fulfilled her investment objective nor coincided with her investment tenure. As we have shown, both these critical parameters could have been fulfilled better by low-risk FMPs, debt funds, FDs and POMIS.