Gulf News December 12, 2009
13 December 2009
Gulf News: "The Pros and Cons of Unit Linked Funds"
Q. I am interested in investing in unit linked funds, but am not entirely sure how they work. What are the pros and cons of investing in such funds offered by various overseas asset management companies, and historically how have they performed?
To bring it down to its most basic level, unit linked insurance is a way for individuals to invest as part of a group, in a range of assets, from a number of specified funds. They are an attractive form of investment for many reasons, but investors must also be aware of the down sides.
The key advantages of these types of investment are that they allow individuals to spread the risk of investment among a group of people, and across a range of assets, while allowing each policyholder the flexibility of choosing which assets to invest in.
In these plans, the invested amount of the premiums – after deducting for the charges and premium for risk cover as chosen by the policy holders – are pooled together to form a unit fund. A unit is the policyholder’s share of the fund in relation to the amount invested.
Spreading the risk is achieved because each fund invests in a wide range of securities, which are chosen by a fund manager. Individual investors are able to choose from several different funds, which at any one time are investing in different investments, in different parts of the world.
The various schemes policy holders in unit linked funds can choose from include, diversified equity funds, balanced funds, international funds, property funds. This differs from an equity linked fund in that this is linked to just one type of fund, where each the money from each investor is solely invested in a variety of companies’ shares or equities.
Another bonus with unit linked funds, is that individuals are effectively joining hundreds, or even thousands, of similar types of investors in a particular fund, meaning they are able to benefit from the services of a specialist fund manager – who they would not be able to access if investing their modest amount of money alone.
However, instead of taking the fund manager’s advice, individuals investors can choose to ‘go it alone’, but it is important to remember that in these plans, the investment risk is generally borne by the investor. The policy value at any time varies according to the value of the underlying assets at that time and returns depend upon the performance of the fund in the capital market.
In unit linked plans, investors have the choice of investing in a lump sum – a single premium – or making premium payments on an annual, half-yearly, quarterly or monthly basis. Investors also have the flexibility to alter the premium amounts during the policy's tenure, such as if an individual has surplus funds, he can enhance the contribution by increasing the regular savings amount or by paying in a single premium, or both.
Conversely, an individual faced with a liquidity crunch has the option of paying a lower amount. Investors can also shift their investments across various plans/asset classes, as they see fit, which can be done for a small fee, or even for free.
In terms of past performance, it is wise to always remember the old saying in the investment industry, that the past performance of funds does not necessarily predict future performance. It is also worth pointing out that unit linked funds are a complex area of investment and seeking the advice of an independent financial advisor would be a prudent move before jumping into this type of insurance plan.
By Roy Gaunt, Training Manager, at Nexus Insurance Brokers L.L.C.