Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

How to Choose between ULIP and MF?

2 min read

Both Unit Linked Insurance Plan (ULIP) and Mutual Fund (MF) have found a lot of favour amongst the investors. With their varied features, both of them present investment opportunities, based on an investor’s financial goals and risk-appetite. However, for as long as these options have been present, a debate has been on as to which one of them is better. As one explores the characteristics of these investment avenues it becomes apparent that both are completely different investment options. Let’s see how.

What is a ULIP?

A ULIP is a combination of a market linked investment plan and an insurance policy offered by insurance companies. One part of the premium is invested in the charges towards life cover, while the rest is invested in debt, equity or a mix of debt-equity funds. The returns are dependent on the market performance of an asset class.

What is a MF?

A MF is a professionally-managed trust that pools the savings of many investors and invests them in stocks, bonds, money market instruments and other types of securities.

SimilaritiesBetween ULIPs and MFs

Both ULIPs and MFs allow investors to invest their money in different asset classes such as equity, debt or balanced funds.

The performance of the funds is measured from the Net Asset Value (NAV) of the units allocated under a particular asset class.

So, What’s Different?: A Quick Comparison Guide

 

Factors ULIP MF
Type Investment + Insurance A pure investment
Objective Long term horizon, ideally 12-15 years Short to medium term horizon, ideally 5-10 years
Life Cover Yes. The investor gets the death benefit up to the amount of sum assured. No. The investor does not get any death benefit.
Method of Investment Two methods: Lumpsum and Systematic Investment Plan (SIP). An investor can opt for a monthly investment option in ULIP under SIP. Two methods: Lumpsum and Systematic Investment Plan (SIP).
Lock in Period 5 years Certain funds like Equity Linked Savings Scheme (ELSS) and others have minimum lock-in period of three years.
Charges Entry load, Annual fund management charges and Exit load. The percentage of charges varies from fund to fund.
Regulatory Body IRDAI SEBI
Liquidity An investor cannot withdraw the funds before maturity. A full exit from the investment by paying exit load charges is the only option.
Free Look Period There is a 15 day free look period. It means that an investor can return his policy within 15 days of purchase if he is not satisfied with it. Not available. Investment once made can be withdrawn only after the lock-in period or after paying exit charges.
Fund Switching There is an option to make fund switches based on market fluctuations or investment goals. The investor has a control over his investments. There is no fund switch option. An investor has to stay invested till the minimum lock-in period or by paying exit load charges.
Tax Benefits ·         Exemption upto Rs 1.5 lakh from total deductible income under Section 80C.

·         The maturity, death and surrender benefits are exempted from total deductible income under Section 10(10D).

·         No taxes on fund switching.

·         Both investment and returns are tax free.

 

(See the chart below)

 

Tax benefits available only under ELSS and a few other tax saving funds. Not all mutual funds offer tax exemptions.
Loyalty Additions and Wealth Boosters Available only in ULIPs. An investor is rewarded with loyalty additions and wealth boosters on staying invested in a ULIP over the long term. They are given on the fund value, which can be a very large amount. They also help in offsetting the charges of ULIPs. Not available.

 

image 1 Tax Advantage

(Source)

 
ULIPs vs MFs: Returns

Some of the best MF schemes have given an average return of 20% every year in last 5 – 7 years. The equity mutual funds schemes have given average returns of 22.25% in the last few years.

The returns on ULIPs with an aggressive allocation (50-75% of the portfolio in stocks) have risen to 28% in the past year.

Image 2 ULIPs Performance

(Source)

The Final Word

It is recommended to invest in a ULIP if you are a long term investor and looking for an investment portfolio based on your lifecycle – children’s education and marriage, retirement, etc. A ULIP works in your favour if you are looking for savings, life protection and wealth creation under one investment vehicle. For instance, with ULIPs from ICICI Prudential, you can not only flexibility and control of your investment, but also secure your family’s future in case of the unfortunate event of your death.

ULIPs are also comparatively low risk investment, primarily because of its insurance component – the insurance provider has to offer the sum assured plus capital gains, if any, at the maturity. While, in MFs, your capital may completely erode in case of high volatility.

MFs also do not include any insurance cover and the only benefit is returns on account of market fluidity.Goal of long term wealth creation as well as securing the financial stability of dependants in an unfortunate case of one’s demise makes ULIPs a good choice.

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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3 Replies to “How to Choose between ULIP and MF?”

  1. Dear Rajendren,
    Thanks for your input..I took SBI unit linked pension policy in 2007 and paid premium @ 50000/- pa till 2010 ie. Rs.200000/- But they have fixed assured inurance amount of only Rs..125000/-, just 2.5 times. I withdrew in May 2015 and got Rs.322000/- after 2% TDS. Now I came to know that the return is taxable as it is inot covered in Sec 10(10D) for which the minimum assured amount should be 5 times.Kindly let me know how much should be considered as tax able income

  2. Basic rule is investment and insurance must not be mixed.Don’t invest in ULIPS.High maintenance charges eat away all margins.AMC,PAC,Taxes,Broker charges are very high.
    Instead, invest in ppf,debt funds,mf.
    Take insurance separately.
    Just my views.

  3. First financial advisory website which is suggesting to prefer investing in ULIPS over MFs. It looks he have some data he analyzed for comparison. Why don’t you write actual investment calculations comparing both Mr.Rajendran ? people having some knowledge on these two policies may smile looking at your conclusion. People who does not have knowledge may follow it religiously as suggested.

    But facts with real portfolio would have given the clear picture at least till now from the inception of ULIPs.

    Regards,
    Anandha

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