ULIPs or Mutual funds - Compare and Contrast

ULIPs or mutual funds

ULIPs are the most talked about investment option today! In fact, they have contributed over 50% of new business for companies like Birla Sun Life and ICICI Prudential. Are you looking for safe investment options in India? Are ULIPs better than Mutual Funds? Are your returns sustainable with ULIPs? Will your ULIP investment work only if you plan to stay invested for a long term? Read on and find out.

Limited amount of money available to invest, need insurance and also want to invest in a mutual fund or similar investment? ULIPs could be the ideal option for you. Unit Linked Insurance Plan (ULIP) is an insurance policy where funds are invested in the capital market. You are sure to find insurance companies vying for your attention with ULIPs in new and attractive packages. ULIPs come with both insurance and investment components. If you’re open to high risk investment options, you can shun the traditional endowment plans for ULIPs which invest the entire principal sum in equities.

The response to ULIPs has been impressive ever since its launch and it has brought good returns for many investors. If you choose ULIPs you enjoy tax benefits under Sec 80C. You can also switch between equity funds and debt funds or vice versa without fearing any entry or exit charges as in the case of Mutual Funds. However your investment in ULIP’s will work only if you stay invested on a long term (more than 10 years).

Have you decided to invest in ULIPs? Here’s a three-step plan to find the right ULIP for you.

Understand ULIPs

Gather as much information as possible on ULIPs that you are considering investing in, understand how they work and seek advice from financial experts on potential best and worst case returns if the need be so you don’t encounter nasty surprises later.

Consider your needs and risk profile while choosing ULIPs

In a volatile market situation, you can invest in ULIPs by way of Systematic Investment Plan (SIP) and turn the volatility of the market into an advantage for you. Keep your long term financial goals in mind while choosing a ULIP portfolio so you aren’t affected by short term swings in the market. If you are a low risk profile investor, then pick debt heavy ULIPs. If you’re younger or have a higher risk profile, then get into an Equity version.

Compare and choose ULIPs

While choosing ULIPs you must find out how debt, equity and balanced schemes are performing. What are the expenses you will incur with the choice of ULIPs? How many times can you change the asset allocation of your ULIP account? Does your ULIP offer you a minimum guarantee? Find answers to these questions before you choose a ULIP.

Are ULIPs a better option when compared to Mutual Funds? Have you invested in ULIPs? Is it better to address insurance and savings separately rather than bundling them under ULIP’s? What suggestions or tips do you have for investors considering ULIPs?


ULIPS VS Mutual Funds: High costs and few benefits



Gone are the days when an insurance company focused solely on insuring your life, health and assets. Nowadays, insurance companies are more eager to manage your investments through unit-linked insurance plans (ULIPs). Indeed, almost 60% of new insurance sales are in ULIPs (the figure is even higher for some new private insurance companies), suggesting that things are topsy-turvy in the insurance world. So much so that a couple of insurance companies offer only ULIP plans, and no traditional insurance products.

Time was when insurance companies insured your life, health and assets, while mutual funds managed your investments. But today , insurance companies’ profitability depends largely on attracting investments in the garb of life cover. It’s a common complaint that insurance applications for health or vehicle protection are often rejected on flimsy grounds. If your application were accepted, chances are the premium would send you in a tizzy. It appears as if most insurance companies are strangely uninterested in the business of providing insurance these days.

Many retail investors believe insurance is a part of one’s investment portfolio. Insurers capitalise on this common misconception and push investment products like ULIPs over traditional insurance products like a term policy or whole life policy. Insurance is primarily a product for protection, whereas mutual funds are ideal conduits for managing investments. So insurance should be used to insure and protect, and mutual funds should be used to create wealth over the long term. Mixing the two, as ULIPs do, can be injurious to your long-term wealth.

ULIPs bundle insurance cover with an investment benefit, in a single contract. They are similar to mutual funds in terms of structure and functioning. The insurer allots units to ULIP investors in the same way as a mutual fund, and the net asset value (NAV) is declared on a daily basis. So, of the total premium you pay on a ULIP, part goes into an investment portfolio, and the rest is used to offer life cover.

ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure—usually in the first three years when your money is locked in. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure—say , 15 or 20 years—thus defraying initial costs.

A better alternative to a ULIP is a combination of low-cost term insurance and a good equity mutual fund. Term insurance provides coverage for a specified period, and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with an equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher. Let’s analyse a few aspects of investing in ULIPs versus mutual funds.
Liquidity

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum lockin of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.

Mutual fund investments, on the other hand, can be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if applicable , are generally for six months to a year in equity funds. So mutual funds score substantially higher on liquidity.

Tax efficiency

ULIPs are often pitched as tax-efficient , because your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in ELSS schemes of mutual funds are also eligible for exemption under the same section .Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan. So they do have an edge on mutual funds, as debt funds are taxed at 10% without indexation benefits, and 20% with indexation benefits. The point, though, is that if you invest in a debt plan through a ULIP, despite its tax-efficiency your post-tax returns will be low, because of high front-end costs. Debt mutual funds don’t charge such costs.



Expenses

Insurance agents get high commissions for ULIPs, and they get them in the initial years, not staggered over the term. So the insurer recovers most charges from you in the initial years, as it risks a loss if the policy lapses. Typically , insurers levy enormous selling charges, averaging more than 20% of the first year’s premium, and dropping to 10% and 7.5% in subsequent years. (And this is after investors balked when charges were as high as 65%!) Compare this with mutual funds’ fees of 2.25% on entry, uniform for all schemes. Different ULIPs have varying charges, often not made clear to investors.

For instance, an agent who sells you a ULIP may get 25% of your first year’s premium, 10% in the second year, 7.5% in the third and fourth year and 5% thereafter. If your annual premium is Rs 10,000 and the agent’s commission in the first year is 25%, it means only Rs 7,500 of your money is invested in the first year. So even if the NAV of the fund rises, say 20%, that year, your portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a 2.25% entry load, Rs 225 is deducted , and the rest is invested. If the scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how ULIPs work out expensive for investors. Deduct the cost of a term policy from the mutual fund returns, and you’re still left with a sizeable difference.

Ulips: tax up, returns down

The biggest propeller of this growth has been the unit-linked insurance plans (Ulips) which have, according to some estimates, accounted for nearly 90% of the new business being generated by life insurers

Undoubtedly, the life insurance industry has been growing at a steady pace over the last few years. A low 2.6% contribution to the GDP figure in 2006 it rose to 3.26% and 4.09% in 2006 and 2007, respectively. The biggest propeller of this growth has been the unit-linked insurance plans (Ulips) which have, according to some estimates, accounted for nearly 90% of the new business being generated by life insurers.
The new edict:The finance Bill 2008-09 has brought the management of Ulips of life insurance companies under the service tax net. The mortality portion of the premium was already being taxed. The direct impact of this, however minimal, would be on the fund value of the policyholder.
What gets taxed: The charge is on the service provided by the insurer to the policyholder. The amount charged for levy of service tax will be the difference between the premium paid and the investible amount segregated for actual investment (including the mortality). For example, on a premium of Rs100, if the mortality charged is Rs10 and the investible amount is Rs85, then the service tax is to be charged on Rs5, that is 100- 95 (10+85).
In simple words, the service tax of 12.36% on Ulips is going to be charged on the entire amount that the insurer keeps after deduction of mortality charges and the investible amount. Much of it is reflected in the front-end premium allocation charge. So, the higher the charge, the higher the impact. Nitin Chopra, CEO, Bharti AXA Life Insurance Co. Ltd, says: “By placing the allocation charges of Ulips under the service tax fold, while the entry load of other market-led instruments are not, Ulips are not being provided a level playing field.”
Elsewhere: In mutual funds, the service tax is charged only on the asset management charge. This fee is only a part of the recurring charges that the fund house can charge based on the size of the corpus. Usually, it is 2.25% of the corpus. The asset management charge is part of this and capped at 1%.
Anil Sahgal, director of strategy and chief investment officer, Aviva Life Insurance, says: “The intent of the Budget speech was to bring equity between mutual funds and Ulips which, perhaps, is not the case according to the illustration given in the Finance Bill.”
Further, the industry feels the tax will hurt insurance penetration in India. Chopra says: “Indian customers prefer investment-cum-insurance plans. Ulips, as a category, promote the value-added benefit of market-led investment. Hence, Ulips need to be supported on the tax front to improve insurance penetration in India.”
The impact: The service tax will lower the returns for a Ulip holder. Says V. Srinivasan, chief financial officer, Bharti AXA Life: “Our analysis indicates that the internal rate of return (IRR) to customers on our products will reduce by 20-40 basis points per annum over a 15-year holding period, on account of this service tax.” This would hold true for most other insurers as well. Shikha Sharma, CEO and managing director, ICICI Prudential Life Insurance, says: “The service tax, perhaps the net of input credit on service tax available to the life insurance company, will likely be passed on to the consumer. As such, there will be no change in the expense ratio of the life insurance company.”
What to do: As various components of the premium of a Ulip are under the service tax net, the overall tax incidence for customers has gone up.
Look for plans that have a low upfront premium allocation charge. However, that does not mean that overall returns would be higher as insurers might resort to higher policy administration and fund management charges. A better way to view the cost-adjusted returns of any Ulip of any insurer is to get hold of the net yield figure.
Will gold get back its shine?
The poor demand for gold witnessed over the last seven months is expected to turn now. As gold prices soared since September 2007, retail buyers kept out of the market. With festivals around the corner and expectations of a good monsoon, experts believe that demand for gold is set to pick up this year. Prices have now fallen 15% from its record highs and this will lead to a spurt in demand, say analysts.
Record prices had cooled the demand in India and imports had fallen by 30% in the three months ended 31 March. Gold exports in March were less than half that of the previous year. Gold buyers preferred to sell old jewellery and buy new ones instead of paying cash for gold. A recovery in demand in India may help push up global prices that have declined to less than Rs11,370 per 10g for the first time in more than three months
Gold is quoting at Rs11,963 per 10g in the spot market currently. Any significant drop in prices, however, is not immediately expected as oil prices and inflation continue to soar. Most analysts predict an average of Rs11,000 per gram for gold for this calendar year. Veena Venugopal/Outlook Money


ULIPS v\s Mutual Funds

Gone are the days when an insurance company focused solely on insuring your life, health and assets. Nowadays, insurance companies are more eager to manage your investments through unit-linked insurance plans (ULIPs). Indeed, almost 60% of new insurance sales are in ULIPs (the figure is even higher for some new private insurance companies), suggesting that things are topsy-turvy in the insurance world. So much so that a couple of insurance companies offer only ULIP plans, and no traditional insurance products.

Time was when insurance companies insured your life, health and assets, while mutual funds managed your investments. But today , insurance companies’ profitability depends largely on attracting investments in the garb of life cover. It’s a common complaint that insurance applications for health or vehicle protection are often rejected on flimsy grounds. If your application were accepted, chances are the premium would send you in a tizzy. It appears as if most insurance companies are strangely uninterested in the business of providing insurance these days.

Many retail investors believe insurance is a part of one’s investment portfolio. Insurers capitalise on this common misconception and push investment products like ULIPs over traditional insurance products like a term policy or whole life policy. Insurance is primarily a product for protection, whereas mutual funds are ideal conduits for managing investments. So insurance should be used to insure and protect, and mutual funds should be used to create wealth over the long term. Mixing the two, as ULIPs do, can be injurious to your long-term wealth.

ULIPs bundle insurance cover with an investment benefit, in a single contract. They are similar to mutual funds in terms of structure and functioning. The insurer allots units to ULIP investors in the same way as a mutual fund, and the net asset value (NAV) is declared on a daily basis. So, of the total premium you pay on a ULIP, part goes into an investment portfolio, and the rest is used to offer life cover.

ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure—usually in the first three years when your money is locked in. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure—say , 15 or 20 years—thus defraying initial costs.

A better alternative to a ULIP is a combination of low-cost term insurance and a good equity mutual fund. Term insurance provides coverage for a specified period, and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with an equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher. Let’s analyse a few aspects of investing in ULIPs versus mutual fundsLiquidity

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum lockin of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.

Mutual fund investments, on the other hand, can be redeemed at any time, barring ELSS (equity-linked savings schemes). Exit loads, if applicable , are generally for six months to a year in equity funds. So mutual funds score substantially higher on liquidity.

Tax efficiency

ULIPs are often pitched as tax-efficient , because your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). But investments in ELSS schemes of mutual funds are also eligible for exemption under the same section .Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan. So they do have an edge on mutual funds, as debt funds are taxed at 10% without indexation benefits, and 20% with indexation benefits. The point, though, is that if you invest in a debt plan through a ULIP, despite its tax-efficiency your post-tax returns will be low, because of high front-end costs. Debt mutual funds don’t charge such costs.

Expenses

Insurance agents get high commissions for ULIPs, and they get them in the initial years, not staggered over the term. So the insurer recovers most charges from you in the initial years, as it risks a loss if the policy lapses. Typically , insurers levy enormous selling charges, averaging more than 20% of the first year’s premium, and dropping to 10% and 7.5% in subsequent years. (And this is after investors balked when charges were as high as 65%!) Compare this with mutual funds’ fees of 2.25% on entry, uniform for all schemes. Different ULIPs have varying charges, often not made clear to investors.

For instance, an agent who sells you a ULIP may get 25% of your first year’s premium, 10% in the second year, 7.5% in the third and fourth year and 5% thereafter. If your annual premium is Rs 10,000 and the agent’s commission in the first year is 25%, it means only Rs 7,500 of your money is invested in the first year. So even if the NAV of the fund rises, say 20%, that year, your portfolio would be worth only Rs 9,000—much lower than the Rs 10,000 you paid. On the other hand, if you invest Rs 10,000 in an equity scheme with a 2.25% entry load, Rs 225 is deducted , and the rest is invested. If the scheme’s NAV rises 20%, your portfolio is worth Rs 11,730. This shows how ULIPs work out expensive for investors. Deduct the cost of a term policy from the mutual fund returns, and you’re still left with a sizeable difference.

ULIP vs Mutual Fund

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 have a small entry load of a maximum of 2.5% which can also be waved off if you apply directly (i.e. not through a agent).

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.

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.