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.
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Anil Rego, CEO of Right Horizons, explains, "According to insurance regulatory guidelines, if the request to switch funds is received before the cut-off time, which is 3 pm*, the NAV as on the same day is considered."
In Sandeep's case, because he made the switch at 1 pm on April 8, he was allotted the units at an NAV of Rs 23, the NAV declared on that very day.
Sandeep's mistakes:
1: He tried timing the market.
2. He did not read the policy document properly and hence was not aware of switching rules.
ULIP is a product that yields returns in the long-term. So, Sandeep should not have given in to 'panic-selling' due to short-term fluctuations. (Also read: Careful mistakes you make)
What he could do now: stay invested.
Tips:
1. Most companies offer three to four free fund switches in a year. Anything beyond will cost you.
2. Rego suggests a strategy for switching. "When the markets scale up, you can move from equity to debt, and when the markets are low you can switch from debt to equity. You could alternatively look at top-up facility as well."
The top-up option allows you to invest at irregular intervals. It's over and above the premium that you pay.
* According to IRDA guidelines, the new cut-off time for fund switches, new policies withdrawals and surrender requests is extended to 4.15 pm.
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