Mutual Funds as an investment plan have the potential to reward you richly in the long run. However, fluctuating market graphs would give you sleepless nights. So, it is not really an inviting avenue in the present scenario. Of course, you can’t write it off totally. But one has to take it easy and not rush into any investment plan without educating oneself about it thoroughly. Unit Linked Insurance Plans have come like a ray of sunshine on a gloomy day! Not that it ensures you 100% returns but it definitely does sound promising.

 

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning. As is the cases with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis. Likewise ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component. However it should not be interpreted that except the insurance element there is nothing differentiating mutual funds from ULIPs.

 

Unit Linked Insurance Plan (ULIP) and Mutual Fund (MF) are the two most preferred choices for a part time investor to invest into equity. But how do we decide which one should we go for. Even if it is very easy to decide, people are likely to confuse themselves most of the time. This article talks about some points that you need to think while making a decision such as which option we want to take, where to invest, etc. Mutual Funds are pure investments but ULIPs offer you a combination of Insurance and Investment. First question that we need to answer while buying ULIP is - Do I need to buy insurance?

 

 

If the answer to the above two question is yes, you need to buy insurance.

 

Now let us compare ULIP and MF based on certain well known facts:

 

ULIPs provide you with insurance cover. But MFs don’t provide you with insurance cover. So it is better to prefer ULIPs because in MFs you will get the return only if you contribute during a period.

 

ULIPs generally come with relatively high entry load. For different schemes, this may vary. MFs have a small entry load of a maximum of 2.5%. But now SEBI has banned charging entry load on Mutual Funds. Here MFs have a huge advantage.

 

ULIPs normally come with a maturity of 5 to 20 years. That whatever money you put in, most of it will be locked-in till three years. Tax saving MF (Popularly called as Equity Linked Saving Scheme or ELSS) comes with a lock-in period of 3 years. Other MFs don’t have a lock-in period.

ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that.

ULIPs would normally make you pay at least first three premiums. MFs don’t have any compulsion on future investments. If you have invested in a MF this year, and in the next year you don’t have sufficient income or money to do investments you can decide not to make any investments. Also if you notice that the MF that you invested in is not giving good returns as compared to some other Funds scheme, you can choose to invest in some other MF.

 

ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free. But in MF you don’t have any Tax benefit, only if you are investing in Tax Saving MF you will get the Tax Benefit. But here it has a lock in period of minimum 3 years.

 

ULIPs give you both modest and aggressive exposure to equity market. Debt and Liquid MF let you invest with low risk, but they don’t give you tax benefit. ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep more that 60% of their funds in equity market. ULIPS also allow you to change your equity market exposure. Thus it can help you to time the market and still give you tax savings. If a MF has a less than 60% exposure to equity market the returns from it are not tax free. Thus you don’t get to take a conservative stand on returns.

 

ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty.

In ELSS premature redemption is not allowed. For an open ended scheme one can redeem the MF anytime. This is mainly useful if the market is down at any time. In case of ELSS you can wait till the market comes up again and then redeem them.

  

In spite of the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they work.

1.    Medium Term to Long Term Investments

2.    Fund Management Expenses will be less (1.5%)

3.    Entry load will be high

4.    Insurance Maturity Amounts are Tax Free in the hands of the investor (In India)

5.    Not much of varieties are available

6.    In General ULIP Products has min of 3 years lock in period

7.    Value based investment

8.    Need to explain the benefits of the investor and make them understand about hidden charges and benefits involved

9.    Investor who would like to protect his life / health and also make some money, can invest in ULIP

1.    Short Term to Medium Term Investment

2.    Fund Management Expenses will be high (2.5%)

3.    No entry load

4.    No tax benefits on Mutual Fund (Only Equity Mutual Funds has some income tax benefits)

5.    Varieties of Mutual funds / Sectoral Funds are available

6.    In case of open end mutual funds, investors have high liquidity

7.    Growth oriented investment

8.    Investor can Easy to understand

9.    Investor who can view only Investment can go for Mutual Fund

 

ULIP can be a very good instrument to invest in, if you are willing to stick to it for a long period of time — in the range of 10 to 20 years. If you have a short span of time at your disposal, it is better to invest in Mutual Funds and buy term plans to take care of your insurance coverage.

The main difference between ULIP and Mutual Funds is variation in expenses — administrative charges, mortality charges and, of course, fund management fees. We are going to compare ULIP and Mutual Fund to suggest that, over a longish period, ULIP's expenses work out to be lower than that of an equity Mutual Fund, and so you end up getting more of your money to work for you.

Since insurance companies charge high selling expenses in the first year's premium, short-term investors stand to lose. But, if one were to analyse the benefits of ULIPs over mutual funds, all else being equal, there may be reason to look at ULIPs, purely because of the lower expense ratio: The Fund management charge (FMC) of insurance companies is 1.5%, whereas in the case of mutual funds it is around 2.5%. Therefore, in the longer term, when the funds of individual investors under management become large, the difference of 1% matters a lot. It counterbalances the higher charges taken by insurance companies during the earlier period of the fund. From the below given illustration you can clearly understand the performance of both ULIP and Mutual Fund.

Some of the Best Performing ULIPs in the Industry

Below given table will show you the returns of some of the best performing ULIPs in the market for the last three years. 

Below given table will show you the returns of some of the best performing MFs in the market for the last three years.

Below given example will help you to understand the growth of money in both ULIP and Mutual Funds. In this example we are assuming that you are investing Rs. 10000 every year in MF and ULIP. We have assumed the return on ULIP and MF as 14%. In ULIP, Fund Management Charge (FMC) is 1.5% but in MF it is 2.5%. Apart from that ULIPs will charge a Premium Allocation Charge on your investments; it differs from plan to plan. In this example we have considered it as 10% for the first and 2% thereafter.

Returns from ULIPs

This table will provide you information about the growth of money invested in ULIP during a period of 20 years. Provided you are making an investment of Rs.10000 every year.

 

·         Return after 5^th year = 68885.11

·         Return after 10^th year = 193292.28

·         Return after 15^th year = 415393.45

·         Return after 20^th year = 811905.36

Below given table will help you to understand the return on investments from Mutual Funds over a period of 20 years, provided you are investing an amount of Rs.10000 every year.

 

  

·         Return after 5^th year = 69428.83

·         Return after 10^th year = 187213.06

·         Return after 15^th year = 387031

·         Return after 20^th year = 726017.05

 

Analysis of Return  

According to the illustration given above, in 5^th year MF has generated Rs. 543.72 more than ULIPs. But from 7^th year onwards ULIPs will give you more returns. In the 10^th year ULIPs will give you Rs. 6079.22 more than MFs. In the 15^th year it is Rs. 28362 more and in 20^th year it is Rs. 85888.31 more than FD.

From the below given graph you can clearly understand the performance of ULIP and Mutual Fund over a period of 20 years.

 

 Now you might have a doubt that charges are more in ULIPs then how ULIP can generate more return than Mutual Fund. Only Fund Management charges are less in ULIP (ULIP – 1.5%, MF – 2.5%). But this is the point where people get misguided. The difference of 1% in FMC makes huge change in the return. ULIPs charges Premium allocation charge of 10% in the first year and 2% from second year onwards. But remember Premium allocation charge is levied only on your premium, not on the entire fund value. For example, if you are investing Rs. 10000 every year, in the first year Premium allocation charge will be Rs. 1000 (10% of 10000) and from the second year onwards it will be Rs. 200. But Fund Management charge is levied on the entire fund value. For example, if your fund value is Rs. 1000000 at the end of ninth year, during the tenth year MF will charge Rs. 25000 (2.5% of 1000000) as FMC. But ULIPs charges you only Rs. 15000 (1.5% of 1000000). Because of this reason ULIPs are able to generate more returns in the long run.