ulip-vs-mutual-funds

ULIPs vs Mutual Funds -Which is a better Investment Option?

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ULIPs V/s Mutual Fund + Term cover- Which one is better? If you Google these words, you are likely to come across a plethora of articles. This has always been a longstanding debate and various financial advisors and investors have had varied opinions on it so the best way to deal with this dilemma is to use the support of facts. In the following table we make apples to apples comparison between ULIP’s and Mutual Funds + Term Plans.

Unit Linked Insurance PlansMutual Funds + Term Plan

ULIPs basically are very much like fund operated investment tools in which charges are deducted for operational matters and rest goes as investment in various funds.

Every ULIP thus has a cost linked with it.

  • Essentially they have insurance/ Life cover linked with it.
  • They provide transparency and flexibility as compared to other investment options in insurance segment
  • Triple tax benefit structure is applicable.
  • Initial tax is saved under 80C. So premium paid upto 1 lakh can save upto 30K depending on the tax bracket.
  • The final amount at maturity is tax free under section 10(10D). Thus the income is tax free for self as well as the nominee. 
  • The whole investment amount does not bear any service tax other than the mortality charge.

Mutual funds are again market linked products maintained by fund managers helping with investments in right instruments, thus helping in balancing risk.

Like ULIP, MFs too have cost attached. Term plan added brings additional cost.

  • Life cover is provided by the term cover (mortality cost turns out to be cheaper for a healthy, young, non smoker individual)
  • Transparent product. All costs are declared.
  • 80C is provided by specific schemes only. These schemes have a lock-in for 3 years essentially. Cost structure work differently for these schemes and are on a higher side.
  • Long term/ short term capital gain taxes are applicable.
  • Other than these tax saving ones, lock- in is not applicable


Coming back to returns & cost structure, let’s look at an illustration and decide. The figures below are for a 25 year old male investing Rs. 50,000 annually for a period of 20 years.
 

AmountYearMF @ 1.5%MF @ 2.25%TermULIP (Aviva I-growth)
5,000 1 53190 52785 890 49,002
5,000 2 110584 109725 890 101,202
5,000 3 171639 169837 890 156,814
5,000 4 236589 233297 890 216,064
5,000 5 305684 300291 890 279,791
5,000 6 379186 371018 890 349,835
5,000 7 457378 445683 890 424,463
5,000 8 540559 524508 890 503,977
5,000 9 629047 607723 890 588,581
5,000 10 723180 695573 890 678,576
5,000 11 823319 788316 890 774,305
5,000 12 929847 886226 890 876,135
5,000 13 1043171 989588 890 984,453
5,000 14 1163725 1098709 890 1,099,674
5,000 15 1291971 1213907 890 1,222,237
5,000 16 1428399 1335521 890 1,352,610
5,000 17 1573530 1463910 890 1,491,290
5,000 18 1727922 1599450 890 1,687,972
5,000 19 1892163 1742539 890 1,903,464
5,000 20 2066883 1893598 890 2,139,564


In the long term, ULIPs take over Mutual funds in terms of return. There is a bigger picture though that needs to be considered. There is a much greater chance for the value of this ULIP to grow higher. In our case above, the return has been assumed at 8% market growth for ULIP. Let’s look at the cost structure to take a view clear of this assumption.

YearULIP on premium paidMF + Term on premiumULIP on FVMF + Term on FV
1 9% 4% 10% 4%
2 11% 7% 5.35% 3.11%
3 12% 9% 3.92% 2.83%
4 14% 12% 3.21% 2.68%
5 14% 15% 2.58% 2.60%
6 12% 19% 1.75% 2.54%
7 14% 22% 1.67% 2.50%
8 16% 25% 1.62% 2.47%
9 19% 29% 1.59% 2.45%
10 21% 33% 1.58% 2.43%
11 24% 37% 1.57% 2.41%
12 27% 42% 1.55% 2.40%
13 30% 47% 1.55% 2.39%
14 34% 51% 1.54% 2.38%
15 37% 57% 1.53% 2.38%
16 41% 62% 1.53% 2.37%
17 45% 68% 1.52% 2.36%
18 50% 74% 1.47% 2.36%
19 56% 81% 1.47% 2.35%
20 56% 87% 1.31% 2.35%


Here it is clearly evident that the ULIP has higher cost in the initial 4 years post which MF plus term takes over.
Also, please note that term cover will have a constant life cover of 5 lakhs here throughout these 20 years whereas ULIP product has 5 Lakhs or Fund value whichever is higher paid out. Hence, in later years life cover of ULIP has decreased. There are few ULIPs (Typre II Ulip) which has a constant life cover too. Those have not been taken into account in this calculation.
Another point is that tax saving has not been taken into consideration in this illustration. ULIPS have a much stronger case in such instances. If you want a glimpse of this, simply deduct the tax saving from the premium you pay to get a glimpse of what that offers. The return is tax free as well.

Note that ULIPs have a lock in for 5 years. The regulators believed the risk may be too high in case policyholders decide to opt out of the policy in the initial 5 years. Thus this restriction has been put in place. In Mutual fund there is no such restriction. Policyholders can opt out any time they wishes to. However for someone who does not track market that often, this could turn out to be a very risky business.

In my opinion, the most valuable point offered by ULIPs is investment discipline. You know that you have to pay premium by due date in order to avoid the policy from getting lapsed. This will make you pay these premiums. Thus a regularized saving is ensured giving you a big corpus amount by the end. In Mutual funds there is no such restriction. You can opt for Systematic Investment Plans to keep up the habit of putting money aside. In case you opt out, there are no penalties involved.

So to summarize, one should look up to investing in ULIPs if they belong to any of these categories:

  • They have tax savings to do under 80C
  • They plan to invest longer than 10 years. 
  • Also, the above calculations have been done using ULIPs made for online purchase. These have a lower cost as compared to those available for retail sale offline. So buy an online ULIP to reap maximum benefit. 

    Happy Investing.