Mutual Funds or ULIPs: Where to Invest?

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Marketers innovatively use ‘Combo Offers’ to sell products. For example, when you buy a mobile phone, the seller provides an ‘Extended Warranty’ or ‘One-time Screen Replacement’ at a discounted price.

Such product combinations are a win-win situation that benefits both the buyer and the seller.

What does this have to do with mutual funds or ULIPs?

Mutual Funds offer pure investment options. Thus, depending on the investment objective of the mutual fund, it will invest your money across different asset classes.

Unit Linked Insurance Plans, better known as ULIPs, are a product offering from insurance companies that provide a ‘Combo’ of investment and insurance. The underlying investment funds offered by ULIPs are similar to that of mutual funds.

You may not always opt for combo offers. Whether or not to buy an investment product depends on one’s need.

Similarly, when choosing between mutual funds and ULIPs you need to keep in mind your financial needs.

Before discussing the differences between Mutual Funds and ULIPs, let’s take a quick look at how these products work.

How do mutual funds work?

A mutual fund scheme garners money from you and other investors and allows units in return. The fund manager then allocates the money pooled by the mutual fund over a set of stocks or bonds that form the portfolio of the fund. The fund manager decides the portfolio allocation.

The price of each mutual fund unit is known as the Net Asset Value (NAV), which is derived from the value of the underlying securities. Investors can buy and sell mutual funds at the applicable NAV.

How do ULIPs work?

As mentioned earlier, ULIPs are a combination of investments and insurance. Every ULIP policy has a minimum premium amount and a premium payment term. The sum assured is a multiple of the premium amount. You may choose to make a Single Payment or Regular Payment over the policy term. The policy term ranges from a minimum period of 5 years to as much as 20 years.

Every premium you pay, part of it is deducted towards the insurance cover, which is the mortality cost. Apart from this, other charges in the form of Administration Charges and Premium Allocation Charges are deducted. The resultant premium is then invested in the funds selected.

Every ULIP has a list of underlying funds that have a predefined investment strategy. You may invest in a single fund or divide your investment across multiple funds based on your risk profile.

Insurance Funds are similar to mutual funds, but you can invest in them only through a ULIP.

Mutual Funds Vs ULIPs

Comparison Parameters ULIPs Mutual Funds Winner
Insurance Cover Provides an insurance cover which is a multiple of the premium paid No insurance cover. But certain fund houses offer insurance coverage through their SIP plans – such as Aditya BSL Century SIP & Reliance SIP Insure ULIPs – For the insurance cover
Liquidity All ULIPs come with a lock-in period of 5 years. Partial withdrawals are allowed with a charge Only Close-ended Funds and Equity Linked Savings Schemes have a lock-in period. Partial withdrawals allowed subject to a minimum amount or a minimum number of units. May attract an exit load if redeemed before a specified period Mutual Funds – Most mutual funds can be liquidated based on the requirement of the investor
Switching Funds Allowed but may attract charges at the discretion of the insurance provider. Switches between funds are not subject to the tax norms Allowed if units are free from the lock-in period. A switch is considered as a redemption from the source fund, hence, is subject to taxes and exit load, if applicable Tie – Both Mutual Funds and ULIPs have their pros & cons
Costs Include Mortality charges, Premium Allocation Charge, Fund Management Charge and Administration Charges Transaction Charge (Rs 100/150) if applied by the distributor. Fund management charges (up to 3% for equity funds & 2.75% for debt funds). Mutual Funds – Work out to be cost-effective for a holding period of 3 years to 5 years. ULIPs turn out to be cost-effective if holding period is 10 years +
Tax Benefits Premiums paid are covered under the Rs 1.5 lakh limit available under Section 80C of the Income Tax Act.
Fund Value or Sum Assured payable at maturity is tax-free under Section 10 (10D) of the ITA.
Only ELSSs and certain Mutual Fund Retirement Plans are eligible for tax benefits under Section 80C. Long-Term Capital Gains or Short Term Capital Gains on investments will be subject to tax as being the prevailing Income Tax norms ULIPs – As per the prevailing tax laws, ULIPs have a clear tax advantage
Choice of Funds Once you purchase a ULIP the choice of funds is limited. You can invest or switch to only those funds offered by the ULIP Unless you invest in a close-ended fund or ELSS, you are free to withdraw your investment and invest in any mutual fund across Asset Management Cos. Mutual Funds – The investment universe is not limited
Transparency The performance of ULIP funds is not freely available for comparison. Hence, a detailed analysis is tedious to identify the top funds in a category The data for mutual funds are freely available, thanks to strict regulations. There are several aggregators that offer mutual fund comparison tools thus allowing the investor to make an educated choice Mutual Funds – MFs are among the most transparent investment products available in the market today

 

Clearly, mutual funds are the best investment option for investors. The choices are many and you get access to different investment strategies. Even if you choose a fund or fund house that does not perform as expected, you can easily redeem your investments and invest elsewhere. However, in ULIPs the process is not easy and is riddled with costs.

ULIPs can be looked at as an alternative to term insurance, where the period of coverage is over 10 years or more. Though the premium will be higher for the same level of coverage, part of it is invested in ULIP funds that can generate reasonable returns over the policy period. You will also gain tax benefits for your investment.

If you are interested in mutual fund recommendations, get access to PL’s Award Winning Research- Extended to mutual funds now!

To get started,  email us at investactive@plindia.com  or contact us at 1860 210 2222 or WhatsApp/call us at 02266322366 today!

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