How a polarised market turned Ulips, equity funds out and out laggards (2024)
The headline Nifty50 index has not been an ideal representative of market conditions over the past 1-1.5 years. Even though Nifty50 has seen a marginal correction from its lifetime high recently, at the time of writing this column, the broader market (small/midcaps) and several sectors have seen a much deeper correction since the end of year 2017.
This polarisation has been quite severe, elongated and also unusual for Indian market. Only a handful of stocks pushing Nifty50 higher.
As highlighted in the table, between the end of 2017 and that of July 2019, bulk of Nifty index returns was contributed by a handful of stocks: top 10 performers contributed 1,744 points, while the remaining 40 stocks pared it by (-) 1,157 points. If we consider the headline Sensex, the narrowness/ polarisation would be even more severe.
For the Nifty Midcap index too, there has been quite a bit of divergence in returns, with the top 10-15 stocks contributing bulk of the returns over the same period.
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The broader market and several sectors have significantly underperformed.
Even though Nifty50 has returned around 6 per cent between end of December, 2017 and end of July, 2019, several sectors and the broader market have significantly underperformed during this period. Only two sectors, IT (+41%) and Banking (+14%), have outperformed Nifty over this period, while FMCG has also fared better, delivering a 4% return.
All other sectors have mostly been in the red, and several of them have registered significant losses during this period.
The broader market has seen a deeper correction over the same period, with Nifty Smallcap100 index and Nifty Midcap50 index delivering negative returns of (-) 39 per cent and (-) 21 per cent, respectively. An analysis of the companies in the Nifty50 index and Nifty Midcap50 index indicates how deep the correction and the divergence in returns has been.
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As shown in the table, close to half of the companies in the Nifty 50 Midcap index have slipped 25 per cent during over the specified period, while 30 per cent have fallen between 0 per cent and 25 per cent. For the Nifty50 index, 36 per cent of companies have slipped up to 25 per cent, while 16% have returned between 0% to 25 per cent over the same period.
With the correction, valuations have become more reasonable, especially in the small/midcap segment. With the deep correction seen in mall/midcap segment, the valuation premium that these stocks enjoyed over their largecap peers at the end of 2017 has come down significantly, and they are currently trading at a healthy discount. Historically, midcaps have traded at a valuation discount to their largecap counterparts. In the largecap segment (barring a few pockets where valuations are rich due to the narrow market), valuations have become more reasonable, after the correction. Although we still continue to be more positive on largecaps, some attractive bottomup opportunities have emerged in midcap segment.
Conclusion: The narrow and polarised markets have also taken a toll on the performance of equity mutual funds and Ulips. Since Ulips and mutual funds are more diversified in nature, bulk of the largecap funds have underperformed Nifty50 over the past year or so. Also, the weightage of certain sectors (like banking & financials) has increased to almost 40 per cent in the benchmark Nifty index. Since Ulips have a regulatory restriction of 25 per cent exposure to a particular sector, and with banking sector emerging as one of the top performing sectors — this underweight exposure to the sector has also been a drag on returns given by Ulips over the past year or so.
With the narrow market phenomena, and only a handful of stocks pushing up the headline Nifty50, valuations have become quite elevated in these pockets. We feel a large part of this market polarisation maybe behind us now, and expect the narrowness to start evening out going forward. We believe India is still a stock pickers market, with potential to generate good alpha by active fund managers in the long run.
As the market matures, the alpha potential may start to narrow down, like it has happened in some of the other developed markets — but I don’t believe we are there yet. It would be prudent for investors to evaluate performance over a market cycle (both up and down market) and over the long term, rather than focusing too much on short-term performance.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
They are a combination of investment and insurance, all in one plan. They also offer multiple tax benefits. If you want to make your first investment, a ULIP could be the best choice as it offers a good amount of flexibility for minimizing risks.
Also, you need to be aware that when you purchase an ILP, the investment risk will be borne entirely by you. The performance of the units is subject to market forces, and the price of the funds of the ILP can rise or fall. If a fund does not perform well, the cash and maturity values will be adversely affected.
ULIPs combine insurance and investment plans, while mutual funds vary in risk and returns. Factors like lock-in periods, transparency, expenses, and tax benefits differentiate the two. Investors should choose based on investment horizon, risk appetite, and financial goals.
Upon policy maturity, ULIPs pay out the fund value as a maturity benefit as per the policy terms & conditions. ULIPs also allow the benefits of partial withdrawals, switching, premium redirection, top-up premium, etc., so that you can manage your investments per your needs.
Here are some disadvantages of a ULIP: Subject to market risk: ULIPs invest your money in the stock market and are therefore highly volatile. Depending on how the market performs, your returns could either factor in a profit or a significant loss.
The above mentioned diverse benefits make ULIPs an ideal investment tool for your long-term financial goals. If, like Kedar, you are seeking a cover for your family and at the same time looking for a suitable financial instrument for market-linked growth, ULIP becomes a reasonable choice with such benefits.
Low insurance cost with flexibility – The insurance component in an ILP function just like a term plan, but with greater flexibility. The insurance cost is extremely low when we are young, and we also enjoy the freedom to increase/decrease the coverage as we wish.
ILPs provide insurance protection in the event of death. Your beneficiaries will receive either: the sum assured or value of your sub-funds investment, depending on which pays more. The sum assured is typically fixed when you purchase the ILP, and the value of your sub-funds investment depends on financial markets.
The cash value of an ILP depends on the performance of the investment- linked fund(s) selected. The returns are not guaranteed. If you invest in an ILP, you need to be prepared that the cash value of your policy will fluctuate according to the fund(s) performance.
Since a portion of the premium in ULIPs and Savings Plans is invested, the death benefit is typically lower than what you would get with a term insurance policy. Consumers must be aware of the higher costs and market risks associated with these plans.
ULIPs offer the flexibility to switch between funds as per your requirements and market conditions. This helps you align your investment as per your goal and risk appetite. If you are open to taking more risk, you can switch to equity funds. However, if you want to lower the risk, you can move to debt funds.
Yes, you can choose to surrender your ULIP within the five-year lock-in period. However, any fund manager or accountant will tell you that staying invested is better for your finances.
How Much Return Can I Get on a ULIP Policy After 10 Years. Market experts estimate a return of 10-12% annually on a ULIP plan with a 10-year tenure. The returns on a 10-year ULIP policy usually outperform other investment instruments, such as Public Provident Fund and National Savings Certificate.
A 5-year ULIP policy is a type of insurance policy that offers life coverage and investment benefits for a limited period of five years. At the end of the tenure, the policyholder receives a lump sum payment of the sum assured and investment returns.
By understanding these distinctions, investors can make well-informed decisions, avoiding potential traps associated with ULIPs. “If you realise you have been a victim of mis-selling during the free-look period, simply return the plan.
ULIPs are generally considered a risky instrument due to the in-built investment component. ULPs indeed allow investing in a variety of equity and debt instruments, which, in turn, offer returns based on market performance.
The ULIP controversy has shown that regulation of similar instruments by multiple regulators with different regulatory philosophies could perpetrate arbitrage. When commissions for the mutual fund distributors dried out,they immediately shifted to ULIPs,often at the cost of ultimate consumers.
Introduction: My name is Kimberely Baumbach CPA, I am a gorgeous, bright, charming, encouraging, zealous, lively, good person who loves writing and wants to share my knowledge and understanding with you.
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