MUTUAL FUNDS v/s ULIPs

Mutual Funds and the Unit Linked Insurance Plans are both professionally managed investment plans. ULIP provides life insurance and at the same time provides suitable investment avenues. The policy value is the sum assured plus the appreciation of the underlying assets. It is life insurance solution that provides for the benefits of protection and capital appreciation at the same time. The product is quite similar to a mutual fund in the sense that the investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV), and apart from the insurance benefit the structure and functioning of ULIP is exactly like a mutual fund.

The idea of having insurance and investment conveniently rolled into one-product looks alluring enough and saves the common investor the time and effort to consider different options. However, an investor may build a customized solution for himself separating insurance from his investment needs.

 In the case of ULIP, the insurance company deducts charges towards life insurance cover (mortality charges), administration charges and fund management charges from the premium paid by the investor. The balance amount left is used to invest in stocks or bonds or a combination of the two. All premiums paid are eligible for tax break under Sec 88 and come under a lock-in of three years.

The administrative charges levied by the insurance company are quite high during the first few years of the policy. This acts as a dampener as the returns are affected due to lower levels of funds available for investment, and extra cautious approach by the insurance company towards investing doesn’t help either. Whereas, MF comparable administrative charges are very less and they invest their entire holdings in equities quite aggressively in favorable times, thus allowing the portfolio to appreciate rapidly.

The higher administrative charges during the initial years erode the returns and make it less attractive when compared to a mutual fund investment for a similar period. ULIPs are not as liquid as mutual funds. The redemption process takes more time as compared to a mutual fund. If one intends to redeem after the lock-in period of three years, he would be at a loss because of higher initial administrative charges.  

Portfolio disclosure is another area where MF score over ULIPs and though leading insurance companies do disclose their portfolio on a regular basis, the competitive pressure in the mutual funds industry lead to higher disclosures and investors know exactly where there money is being invested.

Although ULIPs offer certain benefits, which MFs are unable to provide for, for example certain ULIPs with a capital guarantee. This product protects individuals from a potential market slide. In case of a market slide, the insurance company purports to at least return the premium paid by the individual. This is unlike investments in a mutual fund scheme where investors are partner to both profits as well as losses incurred by the scheme. Switch in/out from different asset classes is also allowed at no extra cost, and investor can conveniently transfer his investments from an equity scheme to a debt or balanced scheme. The investment amount that an investor pays can also be altered as per his wishes during anytime in between his maturity period. 

          

Thus it is better to keep insurance and investment needs separate.           Investing in Mutual Funds can be done systematically. Systematic Investment Plan, Systematic Transfer Plan and Systematic Withdrawal Plan offer greater benefits than lump sum investment. People investing in MFs through SIPs may benefit through Rupee Cost Averaging. Here the average cost of buying units is kept low. It works out to be a disciplined investment practice that takes the guesswork out of timing the markets. It involves investing a fixed amount in the same investment plan at regular intervals–say every month or every quarter. The essence of this strategy is that more units are purchased automatically when prices are low and fewer units when prices are high. Over time, this results in the average cost per unit–the money investor pays–being lower than the average price per unit.         

 Unlike mutual fund, SIPs which are not long-term by nature, insurance plans cushion immediate market fluctuations as well as long-term market fluctuations varying over investment cycles. And as charges on ULIPs are front-loaded, the benefit on unit values over a 15-year period (or more) is pronounced. If well planned, insurance can work favorably as effective savings tools, especially if investor also factors in the tax benefits. Contributions in to insurance plans provides Section 80C benefits up to Rs 1 lakh invested and, at the time of maturity the proceeds are tax free under Section 10 (10D), making these preferred instruments for many.                              

Hence it may be concluded that both Unit Linked Insurance Plans and the Mutual Funds are good in their respective domains. Investors should not club their insurance and investment needs. ULIPs offer a better preposition in terms of returns to investors over traditional insurance plans. They cover life and over and above that they help in growing in the money of investors. It is always good that investors start early and select the right insurance-cum-investment plan for themselves and utilize their tax break limit fully.

Mutual Funds are for a different class of investors. People who want to spread out their risk and still earn a handsome return; Mutual Funds would be the right investment avenue. Although no tax breaks are offered, Mutual Funds have a potential to give extraordinary returns that may even compensate for the tax part. But there is a note of caution for the investors that they should constantly monitor their portfolio and the Scheme in which they have invested. Careful monitoring and an intelligent approach could definitely help in earning fortunes.