ULIPs Are Equally Flexible As Mutual Funds, Says Yashish Dahiya

One of the benefits of investing in ULIPs is that there are no switching charges during the investment period. You can easily switch between equity and debt funds as often as you want in a year. Read the excerpts from the interview here: 

Q.How have the returns on ULIPs been?

A. There are a lot of ULIPs offered by companies like Bajaj Allianz or Edelweiss which are five stars rated by Chicago based financial services firm, Morning Star. These are as good as any mutual funds. So, you get pretty much the same returns. You have to choose your funds wisely when buying a ULIP. Choose those who have been performing well and have been managing funds better. 

Q. Unlike mutual funds where you can walk in and walk out, there is a five year lock-in period in ULIPs. When you tell people to invest especially in equities, it is suggested that even a three or a five year period is not enough. You should invest much longer if you really want to build wealth. 

A. Let me talk about two kinds of customers. One is a rationale customer who is of the view that he wants to invest for the next 10- 20 years. He won’t worry about the ups and downs of the market because they usually happen. He would have a view that if he stays in the long run, he will make good returns. But these kinds of customers are very few in India. 

Let’s talk about the second type of customer who is very nervous about when do they sell shares. They want to sell when the markets move downwards. My father was very nervous after the budget as he had invested in mutual funds six months ago. He didn’t want to sell debt mutual funds because he would have to pay 30% short term capital gains. Had he invested in a ULIP, he could have switched to a debt fund without any tax seamlessly in one day. So, where is the flexibility in mutual funds? 

So, if markets turn sour, then ULIPs beat mutual funds hands down. In ULIPs, you can move from equities to debt as often as you want in a year at zero cost. If you want to exit a ULIP, there isn’t a charge. Whereas in mutual funds, you will either have to pay short term capital gains of 30% and if you have invested for a long time, you have to pay long term capital gains. Therefore, flexibility is much higher in ULIPs. 

The only exception in a mutual fund is you can withdraw your money immediately if you need them in an emergency for a family event, marriage, or child’s education but ULIPs have a lock-in period of five years.

Q. But then it always said that you should segregate your investments and emergency fund?

A. Emergency funds should be lying in your savings account. My children study in an expensive school and I keep that in a savings account. I get cleaned out every August. Till August, I keep all my savings in the account. I will not go and invest that money in equities as they are not ideal for emergency fund creation. 

People who are giving the argument that mutual funds are more flexible than ULIPs have not considered this aspect. Every ULIP has five different funds. You can go from mid-cap to large-cap to small-cap to balanced funds to debt funds and whatever you want. You can move to fixed income and variable income. I think there are a lot of options in ULIPs which give you the flexibility that every consumer really needs except for an emergency.