My view was that debate between ULIP Vs Mutual Fund was settled long back but I was wrong. 🙁
A few days back someone asked – Which is better ULIP or SIP? 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.
Note – Get Investor Behavior Tool from the end of this post, which is most important to manage your Mutual Funds or ULIP or any market related product.
What is ULIP?
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.
You can read about Mutual Fund Basics
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. (switch without tax implication)||A mutual fund scheme usually follows a theme – Equity, Balanced or sectoral. The allocations are pre-decided up to a large extent. (switch but consider Mutual Fund Taxation)|
|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.
A full withdrawal of the policy can be done before the maturity date subject to a surrender charge & in some cases tax.
|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 cannot be considered for Section 80C benefits in tax calculation except for ELSS funds.
Equity Funds – Capital gains tax is applicable if you withdraw within 1 year of investment. Post that, withdrawals are exempt from tax.
Debt Funds – Withdrawals are taxed at income tax rate applicable to you if you withdraw within 3 years.
Withdrawal after 3 years attracts a tax of 10% tax without indexation or 20% with indexation.
|There are many expenses which makes it costly – Premium Allocation Charges, Policy Administration Charges, Mortality Charges, Fund Management Charges and Surrender Charges.||Usually, there are three types of expenses – Transaction charges (one-time – if your bank or advisor charge), Fund management charges and Exit load. The exit load is only applicable if the investment is withdrawn before a specific period (usually 1 year)|
|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 SIP investments. 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)|
|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 10th year of policy.
Here is the illustration of ULIP this will be base of ulip vs mutual fund cost comparison-
Investing in ULIP is good or bad?
ULIPs are better structured today than when they were introduced. But for an astute investor, it still makes better sense to invest in Mutual Funds and purchase a term plan. It is better to keep investment and insurance separate. You should consider the following factors before you make tour investment and insurance decisions –
- Selection of the appropriate mutual funds as per your risk profile
- Current insurance cover
- Number of Financial Dependents
- Investment goals and time horizon
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. I feel still there’s room to reduce expenses – both in Mutual Funds & Ulips. 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.
Finally, I think you would have got the answer – which is better ULIP or Mutual Fund India?
Now answer my simple question & you will get the tool to manage investor’s behavior. (It is scientifically proven that Investor behavior is the biggest factor when it comes to investment returns.)
Have you ever purchased a ULIP? If Yes, why? If Not, why?
Please, leave your answer below in the comment section.
You will receive the free PDF with Simple But Most Powerful Tool To Improve Investor Behaviour.