ULIP vs Mutual Fund returns is a trending debate these days with investors curious about picking the best among them. Moreover, we come across quite a lot of queries regarding the differences between ULIP and mutual funds in regards to their returns and goals. Thus, making the right choice between the two is dependent on your goals. Also, the nature of both these products is different and caters to different purposes. We discuss more them in this analysis for the benefit of our readers. Let's begin!
What is ULIP?
ULIP full form stands for Unit Linked Insurance Plan. Also, it is a mix of investment as well as insurance cover. The main goal of such a plan is to provide wealth creation and insurance cover. Thus, the scheme invests a portion of the premium in an insurance plan and the rest in a mutual fund. Furthermore, the policy-holder thus makes the premium payment either monthly or yearly. So a portion of the ULIP premium conequently goes to the insurance plan and the remaining into a mutual fund. Furthermore, ULIP's are of 4 types, namely,
i. Equity funds
ii. Debt funds
iii. Liquid funds
iv. Balanced funds
How does ULIP work?
The investors pay a certain premium for the ULIP. It is thus pooled together and after subtracting the expenses, is subsequently invested in various funds such as i. equity-oriented mutual fund, debt-oriented mutual fund, balanced fund, or hybrid fund.
It is also important to know the kind of charges levied by the term insurance providers. Subsequently, these are mortality charges, administrative charges, surrender charges, fund management charges, etc.
To understand this better, let us see an example,
Suppose an investor invests in PNB-Metlife ULIP with a yearly premium of Rs. 2,00,000 for a period of 15 years. Moreover, the below calculations explain allotment,
Initial sum assured: Rs. 20,00,000 (annual premium*10)
Administrative and other miscellaneous charges: Rs. 1000 per month i.e. Rs. 12,000 per year
Net annual investment: Rs (2,00,000-12,000)= Rs. 1,88,000.
Net Asset Value(NAV): suppose Rs. 100
Total units to be allotted: Rs. 1,88,000/100= 1,880
It is thus vital to understand how does ULIP works so that we can analyze ULIP vs mutual fund returns.
What is Mutual Fund?
Mutual funds are a scheme where the pooled money from the investors is subsequently invested in different asset classes like equity, debt, real estate, etc. depending upon the goals of the investors. Moreover, mutual funds are best suited when,
1. Investor's main goal is to subsequently get returns from their excess money.
2. They already have a term insurance plan.
3. Also, they know the risks associated with such an investment.
An investor can either make a one-time lump sum payment or invest through SIP in a mutual fund.
ULIP vs Mutual Fund
| Point of difference | ULIP | Mutual Fund | |||
| Product Type | It is basically an insurance product and thus offers life cover. It also generates returns by investing in shares, bonds, debentures, and other instruments. | It is solely an investment product that generates returns. No life cover. | |||
| Withdrawal | After a lock-in period of 5 years. | Anytime | |||
| Tax-Savings (ULIP vs ELSS) | The invested amount offers tax deductions u/s 80C, but the gains are now taxable. | LTCG under the ELSS scheme is taxable at 10% above Rs. 1 lakh. | |||
| Liquidity | The minimum lock-in period of 5 years. | No lock-in period, hence highly liquid. | |||
| Risk Cover | If the policy-holder dies, the entire assured amount is paid to their family. | In case of death, the money is transferred to the nominee. | |||
| Expenses | Complicated | Transparent. The fees are also lower than ULIP. | |||
| When to Consider Buying | Not recommended as insurance and investments are two different products. | When an investor has multiple goals, with long and short-term objectives. |
Investify Suggests
It is never wise to mix investment and insurance products. ULIP's and traditional insurance plans like endowments often do this. Furthermore, ULIP's have been mis-sold to unsuspecting customers in the past few years. Moreover, it is an opaque, costly, and badly performing product. Moreover, it was sold as insurance to benefit from the earlier tax regime.
However, these tax benefits have now been removed as per the Budget 2018.
Also, ULIP's can be expensive as insurance since you will end up paying lakhs of rupees in annual premium.
We thus strongly discourage our readers from going for Unit Linked Insurance Plans(ULIP's). Instead, you should opt for a simple term insurance plan to take care of your insurance needs and equity funds, debts, PPF, etc. to cater to your long-term investment needs.
Conclusion
With the tax-free status of ULIP's now gone, they will consequently lose the sheen in the times to come. It has also been an investment of choice for the HNI's as it offered great tax relief but ever since the 2018 Budget, this temptation has been dissipated.
Moreover, this has now brought ULIP's at par with mutual funds as long-term investment products. Also, there has been a lot of disparity in the taxation of ULIP's which now stand simplified.
Combining insurance and investment products is never a good idea. Investors should thus avoid ULIP's as it no longer has the same appeal as it used to have some years ago.
