25 Mar 2024

The sorry state of Indian banks

What do you expect a business to do? To add value to its customers’ lives and charge a fee for the value addition. A win-win arrangement where both the business and the customers voluntarily work together for their own benefit.

What do Indian bank employees do? They simply ask the customer for “favours” to benefit the business at the cost of the customer. (Just to be clear, I am talking in general about banks in India; not the entity named Indian Bank.)

This isn’t new; this has been happening for well over a decade now from what I have seen. Whenever I interact with bank employees, most of them push an insurance product. They don’t even pretend that they are helping me, the customer. They openly describe these as requests for favour.

My family members and I have received calls in the past few weeks from bank employees with requests to open fixed deposits so their branch’s balance sheet shows inflated numbers when the financial year ends. I opened a 10 days fixed deposit because I felt I could help a bank employee. That person knows that a 10 days fixed deposit doesn’t serve a meaningful benefit to anyone—neither to the bank nor to me. But still they were happy with my opening that deposit.

Our banks have been measuring the wrong things and incentivising the wrong things for a very long period. Until banks get serious about adding value to customers, our banks will stay as rotten as they are now.

Image credit: rawpixel.com

Until a meaningful positive change happens, I’d continue to repeat my advice: “Do not ever tell your bank that you have money to invest. They are uninterested in your desires and dreams. They only think about how they can transfer some of your money into their own coffers.”

9 Mar 2024

Can we use ULIPs as tax-free debt assets?

It was a shock to pretty much everyone when the government changed tax rules for debt mutual funds in the 2023 budget.

AMCs have since then been trying to adapt by shoehorning “debt-like” funds into unrelated categories. For example, Edelweiss has a multi-asset fund that is offered as a debt fund replacement (but with better taxation). Parag Parikh has launched a similar fund in the dynamic asset allocation category (the “balanced advantage” category).

I was wondering if ULIPs—the infamous Unit Linked Insurance Policies—can be used for debt investment. An investor can invest up to ₹2,50,000 every year into ULIPs and get tax free returns. There is a lock-in period of 5 years, but the funds become redeemable after 5 years irrespective of how long the policy term is. Since the returns are tax free, ULIP debt investments can be attractive even if they earn 1 or 2% less return than an average debt mutual fund.

That’s the theory. But we need to check if that theory holds any water.

The story of my ULIP investment

I started a ULIP 2 years ago to help a bank employee meet their sales target. I had been thinking of repurposing this ULIP as a pure debt investment. But I didn’t pull the trigger as I wasn’t 100% sure. Coincidentally, I received the annual statement for this policy last week, and it was eye opening.

2022 statement for my ULIP (click to enlarge)
2023 statement for my ULIP (click to enlarge)

If you can’t see the issue in these statements, you’re not alone. Most people can’t spot this.

There are 2 kinds of deduction in the statements.

  • “Mortality Charge” is what the insurer is charging for providing life cover. This is tiny because pure life insurance is very cheap. This charge can be ignored.
  • The other deduction, called “Allocation Charge”, is more sinister. This is for charges like policy administration, agent commission, etc. In 2022, when this policy started, they deducted 12% of the premium as the allocation charge. In 2023, this deduction was 8% of the premium.

Let’s look at the impact of allocation charges more carefully. I paid ₹60,000 as the premium in 2022. Of this, ₹7,200 was deducted upfront for fees and commissions, and only the remaining ₹52,800 was invested. To break even by the end of the first year—i.e. for the fund value to be ₹60,000 by the end of the first year—this investment needed to grow by 14%! Making such a return is no easy feat, so it is no surprise that the policy value never touched ₹60,000 throughout the first year.

I paid the next ₹60,000 premium by the end of the first year. Again, ₹4,800 was deducted from this money and only ₹55,200 was invested causing the investment to stay underwater for most of the second year too.

My ULIP’s fund value over the first 22 months

A policy that started in March 2022 has remained underwater till September 2023! This was the reality for a 70:30 portfolio. It took the 2023 equity rally and a big 70% equity exposure to get this investment to break even. Since debt returns are subdued, ULIPs with 100% debt portfolio may even stay underwater for 7+ years.

My hypothesis is still correct: if pure debt ULIPs make 2% less return than average debt mutual funds, ULIPs will be an attractive option. But my assumption that ULIP returns will fall short only by 2% is way off the mark.

Is there a way to salvage ULIPs that are already bought?

What follows is an untested idea. Say, I let my ULIP stay as a equity+debt blend for the first 7 years or so. Hopefully, the portfolio grows to a reasonable size. After this, I can switch the entire portfolio to debt. Given there is no allocation charge after the first 5 years, this can probably be considered a reasonable debt investment. Fresh investments won’t be possible, but partial and full withdrawals will be available.

If you already have a ULIP, this may be a way to salvage the situation. But don’t buy a new ULIP only to get tax-free debt return. ULIPs make a lot of money for insurance companies and agents. Investors have a slim chance of making money through ULIPs.