Wealth: 'I switched funds in ULIPs, lost money'

SAVING HELPS: ULIPs have a lock-in period of three years. There are ways of not losing that money.

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Twenty-seven-year-old Sandeep Dahiya is a geek.

When he's not writing programmes for his employer (a software company in Delhi), he's surfing the Internet or getting acquainted with the latest technologies. But when it comes to money and investing, Sandeep's knowledge takes a backseat. But tax waits for no man.

So, in January 2008 he decided to make an investment for tax purposes.

He did some research by reading up magazines and surfing web sites. Next, he got in touch with an agent and bought a Unit Linked Insurance Policy (ULIP) on January 9, 2008.

ULIP is a combination of insurance and investment. Of the total premiums paid, some of the money is set aside for the insurance cover and the rest is invested in a fund (of your choice), similar to a mutual fund.

Sandeep chose the equity fund option. But soon after, the BSE Sensex crashed from 19600 in the first week of January to 16000 in April 2008. The prediction was that it would fall even more.

In a matter of three months Sandeep's fund value was eroded from Rs 23,000 to Rs 16,224 (a loss of Rs 6,776). He decided to exit the fund.

Since ULIPs have a lock-in period of three years, Sandeep could not sell his fund. But he remembered the 'switch' option mentioned by the agent who sold him the policy; he could switch from equity to the debt option or vice-versa. There would be no tax implications and he could do two free switches in a year.

So, on April 8, 2008, Sandeep checked the NAV of his fund in the newspaper; it was Rs 24 (he held 676 units). On the same day, at 1 pm, he decided to exercise the switch.

His fund value before the switch was Rs 16,224. The next day, when he checked his statement, he found that the amount switched was only Rs 15,548 -- a difference of Rs 676. He called up the company's customer care executive and was informed that the switch was exercised at an NAV of Rs 23.

The switch

What Sandeep saw in the newspaper was the NAV as on April 7, 2008.

Unlike stock prices, which move during the day, the NAV of insurance companies (and mutual funds) are revised only once a day, after the markets have closed. Sandeep exercised his switch on April 8, 2008 at 1 pm, assuming that the switch would be carried out at an NAV of Rs 24.