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.
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