ULIP V/S MUTUAL FUND

I believed that discussion between ULIP Vs Mutual Fund was settled long back but I was wrong. In all of my sessions we have clearly mentioned and explained to keep investment and insurance separate.

But to my surprise, a few days back one of my regular investor asked me– Which is better ULIP or SIP?

This confusion came because his banker told him that Ulip vs Mutual Fund + Term Insurance is a gimmick by mutual fund industry.

Now if someone depends on his banker for financial advice how anyone can help.

We always suggest don’t mix investment and insurance but let’s still check ULIP vs Mutual Fund comparison.

What is Unit Linked Insurance Plan?

Unit Linked Insurance Plans also known as ULIPs are insurance products that combine investment and protection against risk. A ULIP holder pays a periodic premium. Part of the premium is for life insurance and part of it is invested just like in a mutual fund scheme. This continues for many years.

The investor can choose the type of investment. Investment can be made in debt or equity or in both.  The investor can choose depending on his/her risk profile and financial situation.

ULIPs are neither 100% investment options nor 100% insurance schemes. They lie somewhere in between –

ULIP Vs Mutual Fund

Let us look at the difference between a mutual fund scheme and a ULIP –

ULIPs Mutual Fund Schemes
They are investment-cum-insurance products. ULIP investors are offered a sum assured of about 7 or 10 times the annual premium depending on the age and get the option of investing in a variety of investment products. Mutual Fund Schemes are primarily investment products. Investors can invest in money market instruments, corporate bonds, Government bond and equity.

They do not provide insurance cover. (few exception Mutual Fund with Insurance)

ULIPs offer flexibility in investment options. You have the flexibility to switch from a debt oriented option to an equity-based plan. A mutual fund scheme usually follows a theme – Equity, Balanced or sectoral. The allocations are pre-decided up to a large extent. Easy switch allowed in mutual fund and with much more ease.
The plan holder can withdraw money. There is usually a minimum withdrawal amount. But the value of the fund should also not fall below a pre-decided amount. There will be a charge. Charges are on higher side.

A full withdrawal of the policy can be done before the maturity date subject to a surrender charge & in some cases tax. Charges are usually very high.

Different mutual funds have different exit methods. In many schemes, an exit load (fee) is charged if the investor withdraws within a specified period (usually a year).

Mutual funds are much more liquid in comparison to ULIPs.

ULIP Investments can be used for Section 80C benefits in tax calculation.

Maturity receipts of ULIPs are considered to be tax exempt.

Mutual Funds investments considered for Section 80C benefits in tax calculation isELSS funds.

Equity Funds – No tax if withdrawn after 1 year.

There are many expenses which makes it costly – Premium Allocation Charges, Policy Administration Charges, Mortality Charges, Fund Management Charges and Surrender Charges. This is the worst part of ULIP’s. There are alot of charges involved and it makes it very costly. Usually, there is only one type of expenses –Fund management charges. It is also very less as compared to insurance products (ULIP’s).
Premium has to be paid regularly or as a lump sum. Investments in Mutual Fund can be made anytime or in the form of regular SIPinvestments. Investment can be made only once also.

ULIP vs Mutual Fund + Term Insurance

Many people still have the question of whether it is better to buy a ULIP (a combination of insurance and investment funds) or a Mutual Fund and a Term Plan. Let us look at how they compare with this example –

Mr. Rajiv Jain invests Rs. 50,000 for 5 years in HDFC Life Click2Invest ULIP plan for a tenure of 10 years. He has selected for the funds to be invested in a balanced fund.

HDFC Life Click2Invest ULIP
Total Premium Paid Rs. 2,50,000
Total Cost of ULIP Plan Rs. 10,933
Rate of Return on Investment 8% p.a. (assumed) – this is on a higher side
Surrender Benefit at the end of 10 years Rs. 7,05,097
Death Benefit Rs. 5,00,000 in the unfortunate case of his death in the first 9 years of the policy and

Rs. 5,25,000 in case of death in the 10thyear of policy.

Here is the illustration of ULIP this will be base of ulip vs mutual fund cost comparison-

Source

Suppose he had invested in HDFC Balanced Fund (Growth) (base for Ulip Vs Mutual Fund Returns comparison) and taken a term plan, the scenario would be a little different –

Mutual Fund + Term Plan
A term insurance plan from HDFC – HDFC Life Click 2 Protect Plus for an insurance cover of Rs. 25,00,000 Premium – Rs. 3,744 per year for 10 years

Total Premium – Rs. 37,440

It is Rs. 4,687 for a plan with tenure of 20 years.

Investment in a balanced mutual fund – HDFC Balanced Fund (Growth) Rs. 50,000 for 10 years

Total Investment – Rs. 5,00,000

HDFC Balanced Fund (Growth) has an annualised returns of about 18%

(data 2017)

In 10 years, the corpus would be – Rs. 13,88,000.
Cost of Investing in Mutual Fund 2% per year – Rs. 1,16,000
Total Benefit (no unfortunate event of death) Rs. 13,88,0000-37,440-1,16,000 = Rs. 12,34,560
In the unfortunate scenario of death Rs. 25,00,000 will be paid to the nominee and the Mutual Fund Scheme corpus at the time of death can be claimed by the nominee.

As you can clearly see from this example that it is better to buy a term plan and invest in suitable Mutual Fund schemes rather than investing in a ULIP. Even if he had taken a term plan for 20 years, it would be still a better option. So basically by using the option of Term plan and Mutual fund investing you are in a win win situation, you get much more insurance cover and also higher value of investment value.

My View – ULIP vs Mutual Fund for long term ?

Till this point, I don’t find any good reason to prefer ULIP over Mutual Fund. The kind of flexibility & choice that you can get in Mutual Fund is not available in ULIP. The worst part about ULIP in my view is Commission Structure which is still front-loaded (more in initial years) so there’s no incentive for an agent to service & advice after initial years. And ULIP plans are majorly promoted by the banker because of much higher incentive model and top management pressure to sell more of ULIP’s.

 

Finally, I think you would have got the answer – which is better ULIP or Mutual Fund India?

Regards:-

PANKAJ LADHA

CA ANANT LADHA

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