If you are holding a high-cost Ulip, this could be a good time to surrender it

Imagine a situation where your investment grows by 9.5% every year but you have to pay 7% in charges. Many Ulip investors don't have to imagine. For them, this is the harsh reality of the returns that their Ulips have earned in the past five years. Data from Morningstar shows that aggressive Ulip funds that allocate up to 100% to equities have earned average annualised returns of 9.43% in the past 5 years. That's a tad better than the 9.24% delivered by the Sensex during the same period.

However, these numbers only show the rise in the NAV and don't reflect the real returns for the investors. Given the high charges of the Ulips bought before September 2010, many investors have barely earned any returns. Many charges are not taken out of the NAV but deducted by reducing the number of units.

Ulips have long been reviled for their high charges and the opaque manner in which they are levied. Before the 2010 guidelines, insurance companies used to frontload the charges on these plans, making the first few years super costly . But in some Ulips, the charges continue to be high even after the pain period of the initial years is over. In some cases, the charges are as high 6.77% a year. If you include the fund management charges, the total cost to the investor is nearly 7% a year. This means a Ulip must grow by least 18-20% to deliver meaningful returns to the policyholder.

We have not considered the mortality charges here because they are linked to the life insurance cover offered by the Ulip. If you take those into account, the total charges paid by the policyholder will be even higher.

If you are also holding such a high cost plan, it may be time to get rid of this investment. But go through the fine print of the terms and conditions before you close it. There can be surrender charges on pre-2010 Ulips. After the three-year lock-in period, the premature surrender charge is close to 3-4%. This gradually comes down over the next 3-4 years but some policies charge 1-2% even in the fifth or sixth year. Only after the seventh year onwards there is no surrender charge.

Before you surrender the policy, be clear about how the proceeds will be deployed. There is no point in withdrawing the amount if you plan to blow it away. In that case, it's better to remain invested. Those who want to redeem Ulips should have a clear perspective on how the proceeds will be utilised.

Choose an option that best suits your risk profile and investment horizon. If you are risk averse and want to save for your little daughter's education or marriage, the Sukanya Samriddhi Scheme is a good idea. If you don't have a daughter below 11 years, the PPF is your best bet. However, if you want higher returns and can digest a little risk, go for equity diversified mutual funds. The returns will be tax free after a year. For investors looking for tax-free returns as well as tax deduction under Section 80C, the new online Ulips from insurance companies can be a good option. But buy them only if you intend to remain invested for at least 10-12 years. If retirement planning is the objective, you can consider putting ` 50,000 in the NPS under the newly introduced Sec 80CCD (1b).