I have an SBI SMART SCHOLAR ULIP plan which started in Aug 2024 with yearly premium of Rs. 6 lacs. It's almost one year since this plan started, and throughout the duration the fund value has been under loss. Currently the fund value is at Rs. 5.3 lacs. Is it too early to look at the return value? Is it expected to recover? Or should I discontinue this plan?

Ans: You've made a high-value commitment to this SBI Smart Scholar ULIP. That shows concern for your family’s future. This clarity gives us room to build a better strategy together. You’ve reached out at the right time.

Let us evaluate this from all angles. This plan has both insurance and investment bundled together. The product is not wrong, but the fit and structure must be reviewed.

? About the current fund value drop

– The market has gone through short-term corrections this year.
– Equity exposure inside ULIP is often not diversified enough.
– The fall from Rs. 6 lakhs to Rs. 5.3 lakhs is about 12%.
– This drop can happen even in equity mutual funds in the short term.
– The issue is not just the drop. The core concern is product structure.

? Product limitations of ULIPs

– ULIPs lock your money for 5 years.
– They come with higher charges in the initial years.
– Premium allocation, fund management, mortality, and admin charges reduce returns.
– Actual invested money is lesser than what you pay, especially in Year 1 and 2.
– Switching options exist but are limited and not dynamic.
– You can't withdraw or re-allocate aggressively during falling markets.

? Is it too early to judge the performance?

– One year is too short to judge any equity-linked product.
– But one year is enough to assess structure and suitability.
– If the charges are high and flexibility is low, future growth will be affected.
– ULIP charges can eat into your compounding over the years.
– You’ve already paid one premium. That money is partially absorbed in charges.
– Future premiums will face similar deductions.

? Insurance within ULIP is not cost-effective

– Term insurance is cheaper than ULIP-based insurance.
– For Rs. 6 lakhs yearly premium, you can buy a large term cover separately.
– Rest of the amount can be invested freely in mutual funds.
– This allows separation of insurance and investment. That gives control.

? Should you discontinue now?

– Discontinuing in the first five years attracts discontinuance charges.
– If you stop now, funds move to a 'discontinued policy fund'.
– That earns very low returns (around 4%) till 5 years are over.
– You can’t access this money till 5 years are completed.
– So, stopping premiums immediately means liquidity loss.
– If you continue for 5 years, your money stays invested in market-linked funds.
– You get the flexibility to exit without penalties after 5 years.

? How to move forward

Evaluate the actual sum assured in the plan.

Check the policy brochure for exact charges across years.

If you can manage Rs. 6 lakhs yearly for 5 years, consider paying till year 5.

Post lock-in, switch to safer or debt funds gradually if markets remain volatile.

After 5 years, withdraw and move to mutual funds via Certified Financial Planner.

? If you surrender now

– You lose access to Rs. 5.3 lakhs till August 2029.
– That amount earns low interest.
– You avoid paying more premium.
– No tax penalty for surrendering after 5 years.

? Alternative suggestion

– If your insurance need is not high, consider reducing exposure now.
– You can downgrade premium next year (check if partial premium reduction allowed).
– Stop premium after year 2 or 3, depending on your comfort.
– Let the fund continue till lock-in ends.
– At maturity, withdraw and invest in mutual funds with MFD plus CFP guidance.

? Mutual funds are better than ULIPs

– Mutual funds are transparent and regulated.
– Charges are lower, especially in regular plans via a Certified Financial Planner.
– You can switch anytime without exit charges (after 1 year for equity funds).
– Systematic withdrawal plans give monthly income post-retirement.
– SIPs allow flexibility in amount and timing.
– ULIPs do not offer such granular controls.

? Tax treatment comparison

– ULIP maturity is tax-free if annual premium < Rs. 2.5 lakhs (budget rule 2021).
– Above Rs. 2.5 lakhs, maturity is taxable.
– Your premium is Rs. 6 lakhs yearly. Hence, maturity will be taxable.
– That removes one main benefit ULIPs had over mutual funds.
– Equity mutual fund LTCG is taxed only above Rs. 1.25 lakh at 12.5%.
– This makes mutual funds more tax-efficient at high values.

? Role of regular plans and MFD+CFP approach

– Direct funds seem cheaper but lack behavioural guidance.
– In long-term investing, decisions matter more than cost.
– MFDs with CFP expertise help in goal-based planning.
– Regular plans offer personalised tracking, rebalancing, and goal alignment.
– You avoid panic selling and poor entry-exit decisions.
– This helps improve your returns over the long run.
– Cost of direct plans is saved but often leads to bigger opportunity loss.

? Cost comparison should focus on net returns

– ULIP shows zero commission. But charges are baked into NAV.
– Mutual funds show TER upfront. But offer better returns after costs.
– With proper fund selection and review, regular plans give strong returns.
– ULIPs do not give control or tracking tools.

? Future strategy after exit

– Buy a separate term plan of adequate cover.
– Invest future Rs. 6 lakh per year in mutual funds via SIP or lumpsum.
– Link investments to child education, retirement, or wealth creation goals.
– Review fund performance once a year with MFD plus CFP support.
– Diversify across large cap, flexi cap, balanced advantage funds.
– Add debt funds for stability if needed.

? Psychological impact of negative returns

– Seeing a negative value early can cause regret.
– But the market is not punishing you. The product design is flawed.
– You are not alone. Many investors face this in Year 1.
– What matters is how you respond from here.
– Correcting path now helps in wealth recovery.

? Finally

– This ULIP will not give optimal returns.
– You’ve acted wisely by assessing early.
– Don’t judge it only by market fall. Look at structure.
– Avoid continuing without a goal-fit reason.
– Take help from a Certified Financial Planner to exit smartly.
– Separate term cover and mutual fund investing will serve you better.
– Stay patient. Stay consistent. Wealth takes time.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment