Incremental flow from equity MFs to ULIPs could lead to high growth for ULIPs
A few days after Arun Jaitley on Thursday announced the re-introduction of long term capital gains on equity during the Budget speech, market indices have been consistently declining. However, the Budget has been positive for the insurance sector, claim experts. A report released by the Nomura says that the newly inducted capital gains tax will not apply to ULIP. "Long term capital gains (LTCG) of 10% have been imposed on equity investments and investments in equity-oriented mutual funds. Our reading of the finance bill and interactions with insurance companies suggest that LTCG will not apply to ULIP investments," reads the Nomura report. Even Morgan Stanley has given thumbs up to the ULIPs in wake of the LTCG tax. "We believe against the given backdrop, life insurance products, particularly Ulips (unit-linked insurance plans) could appear relatively attractive from a medium- to long-term perspective," Morgan Stanley said in a weekend note.
LTCG not to apply to ULIPs: five things to know
- Long term capital gains (LTCG) of 10% have been imposed on equity investments and investments in equity-oriented mutual funds. The LTCG, however, will not apply to ULIP investments.
- This provides ULIPs a relative advantage to direct equity and mutual fund investments. We believe some part of the tax advantage was justified given the big five-year lock-in for ULIP investments, says the report.
- While nature of the average mutual fund investor and ULIP investor differs especially on the duration of investment, a small proportion of incremental flow from equity MFs to ULIPs could lead to high growth for ULIP-led insurers, reads the Nomura report.
- In the last 12 months, total net inflows in equity-related mutual funds have been Rs 2.2 lakh crore (Rs 18,500 crore monthly run-rate). In comparison, the total new business inflow for private insurers in the last 12 months was Rs 38,000 crore and assuming, 65% of the new business is ULIPs, is Rs 25,000 crore of new ULIP business implying a monthly run-rate of Rs2,000 crore of ULIPs.
- From a budget respective, Nomura sees a re-rating in ULIP-led life insurers, leading to BUYs on ICICI Prudential Life and SBI Life.
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