Unit Links Insurance Plan (ULIP) and Mutual Fund (MF) are the two most preferred options for a part time investor to invest into equity. But how do we decide which one should we go for. Though it is very easy to decide, people tend to confuse themselves most of the time. This article talks about some points that you need to consider while deciding which option we want to take.
Mutual Fund are pure investments. ULIP are combination of Insurance and Investment.
First question that we need to answer while buying ULIP is - Do I need to buy insurance?
1) Does the person seeking insurance have any financial liabilities?
2) If something happens to the person, Is there someone who can be in a financial crisis?
If the answer to the above two question is yes, I NEED TO BUY INSURANCE.
Now let us compare ULIP and MF based on certain well known facts:
1) Insurance
ULIPs provide you with insurance cover.
MFs don’t provide you with insurance cover.
A point in favor of ULIPs. But let me tell you that you don’t get this insurance cover for free. Mortality charges (i.e. the price you pay for the insurance cover) get deducted from your investment.
2) Entry Load
ULIPs generally come with a huge entry load. For different schemes, this can vary between 5 to 40% of the first years premium.
MFs do not have any entry load.
Here MFs have a huge advantage. If we consider a conservative market return of about 10-15% you may get a zero percent return in the first year in case of ULIPs.
3) Maturity
ULIPs generally come with a maturity of 5 to 20 years. That what ever money you put in, most of it will be locked-in till the maturity.
Tax saving MF ( Popularly called as Equity Linked Saving Scheme or ELSS) come with a lock-in period of 3 years. Other MFs don’t have a lock-in period.
Again MFs have advantage over ULIPs. ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that.
4) Compulsion of Investing
ULIPs would generally 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 dont have enough income or money to do investments you can decide not to make any investmets. 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 decide to invest in some other MF.
5) Tax Saving
Both the ELSS and ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free.
6) Market exposure
ULIPs give you both moderate and aggressive exposure to equity market
Debt and Liquid MF let invest with low risk, but 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 to change your equity market exposure. Thus it can help you time the market and still give you tax savings.
If a MF has a less than 60% exposure to equilty market the returns from it are not tax free. Thus you don’t get to take a conservative stand on returns.
7) Flexibility of time of redemption
ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty.
In MF Premature redemption is not allowed. For a open ended scheme one can redeem the MF anytime after maturiry
This is mainly useful if the market is down at the maturity time of the investment. In case of ELSS you can wait till the market comes up again and then redeem them. ULIP scheme won’t allow you to wait.
Thus, According to my opinion
1) If you wish to take a agressive exposure to equity market, go ahead any buy MF. ULIP wont be able to give you similar returns.
2) If you think you are not diciplined enough to make regular investments and need a whip to make you invest, invest in ULIP.
3) If you want to take a low exposure to equity market and still get tax free returns, invest in ULIP but make sure that fund you are invested is conservative fund.
4) If you want Insurance cover and also good return on investment. I would suggest that you invest in MFs and take a term plan.
If you find any information wrong or missing feel free to comment on the post.
Meta: January 3rd, 2008 by
Tags: 17 Comments
Hi
Enjoyed the article but still feel its not giving the clear picture.
Just mentioning some views of mine
(1) There are special Unit Link products packaged for specific needs like child education and marriage or retirement etc. These products do offer complete slution otherwise is difficult to manage financial goals by other invetsment avenuse like mutual fund or equity.
You may answer it by saying with MF and Term also it can be managed. But it will be difficult. Financial Products are all about packaging. If we see Mutual fund as compared to directly investing in equity, investing through MF does reuduces risk. These special package Unit Link Product takes another step and insures other events that can act as hurdle for the specific goal.
(2) For a long term regular investment ULIP shoud be always preffered over MF. The reason are
(a) Its difficult to maintain regularity through MF
(b) In a down market its easy to switch in ULIP that selling and buying MF
(c) MF investment strategy are comparatively for short term
(d) Regualtion for investment in ULIP are strict
(3) ULIP does provide other facilities like changing the life cover as required. This not only takes care that you increase your life cover as and when liability increases and dont have to buy another product but also that when the liability decrease, you dont pay extra for your insurance.
…..and many more
Regards
Rajat Sharma
Hi, the article has a good comparison of MF Vs ULIP.But i like to add on that even ULIPS has a single premium option where u can make an onetime payment for ur investment and insurance needs where the charges are also less.
I like to know, how can we compare ulip pension plans with MF. bassically need based, once when the corpus is reached how can we substantiate which one is best.
Regards,
G.Punitrha
Hi, the article has a good comparison of MF Vs ULIP
Hi all,
Agents are selling ulips saying it is better than MF, only for their higher Commission.
Insurance is necessary for every one to cover our risk.
For this we have pure term policies.
But there is no point in buying ulips as an investment that to paying heavy charges.
Charges are nominal and transparent in MUTUAL Fund.
Chances of getting Higher return are more in MF than Ulip.
[...] ULIPs are conceptually same as Mutual Funds. But there are important differences that an investor needs to understand before deciding his investment plan. To know those differences click here. [...]
ULIPs are a good idea only if the investor plans to pay premiums and stay invested for at least 10 years. The worst part of a ULIP is that the charges are high and they are deducted upfront before on sees the performance. Thus, if the market falls or the scheme underperforms, the investor loses value, but the company and the agent have made their money already. Most advisors do not come clean on the charges and other conditions, thus misleading unsuspecting investors. They push ULIPs (Including ‘Pension Plans’) only because the advisor’s/ agent’s commissions are high, and they are paid at the investor’s expense.
If you want Insurance cover and also good return on investment. I would suggest that you invest in MFs and take a term plan.
I think , it should be ULIPs in place of MFs
It is MFs. MFs give you better return because of less initial cost. You do not have to pay something similar to what are premium allocation charges and policy administration charges in ULIPs.
I beg to differ that MFs are better than ULIPs… as far as the entry load is concerned… I suggest you take a look at Kotak Smart Advantage Plan…. which is undoubtedly the cheapest ULIP in the market today…. for a premium of 36 k or more it has 0 allocation charge…. besides the other costs r far lesser than any other ULIP i knw about… the returns are also better… if you are genuinely looking to invest it is worth checking it out.
Hi Sanghamitra,
If you look closely into Kotak smart advantage, the first year’s premium is not invested like other ULIPs and will give you 3.4% return pa if you commit for 30 years (otherwise it gives even less). This brings Kotak smart advantage at par with other ULIPs though it seems cheaper at the first glance.
Apart from fund management charges(which are also present in mutual funds), policy administrative charges of INR 780(before taxes) are charged per year, which are above 2% of yearly premium if you are investing INR 36000 per year.
You might want to go through http://blog.moneyraam.com/2009/06/kotak-smart-advantage-plan.html on Kotak smart advantage.
Kotak smart advantage plan might seem cheaper but it still can’t compare with pure mutual fund in terms of the charges.
Good information.
MF is better in my view.
Thanks
Y Dutt
In ULIPs the maturity benefit is tax free under Sec 10 10 (d). Where as in MF one has to pay the tax on maturity yeild unless its an ELSS (Equity linked saving scheme or MF in which 60% amount is invested directly into equities) Scheme.
In ULIPs the maturity proceed is tax free under sec 10 10 (d), except the ULIPs with zero death benefit i,e.in plans where no mortality charges (or insurance cover ) are deducted the maturity benefit is taxable .
Sec 10 10 (d) is reserved for insurance product not for MF as is says that any death claim or maturity claim will be tax exempted is its as per terms and conditions (i,e. premium:SA ratio should be 1:5 atleast).
In long run ULIPs are proved much beneficial as compared to MF. MF may offer high return for a short term of invetment (let say 3years).
Regards
Shweta K
MF don’t have any entry load and having only exit load, if the redemption done before one year.
Entry load on mutual funds is removed by indian government. so correct it.
One thing that beats me in ULIPs is that they have several fund options to prevent capital erosion during downturn (by ransferring). If someone can time the market so well they might as well buy and short equities appropriately, right?!
ULIPs and Mutual Funds both are financial products. Choice between these products depends upon various factors like age, financial goals, term of investment and many more.
Mutual Fund is an investment product in which fund is managed by professional managers and the amount is invested in capital markets. Mutual fund is good investment for the purpose of wealth creation over a period of 3-5 years.
This article was simple to understand and it helped me a lot in the prepation of my blog.
thank you