ULIPs V/S Mutual Funds

~Can they be Compared?

ULIPs V/S Mutual Funds : Ever since memory serves me right, man has always tried to compare between two almost similar but not identical things. Be it shopping from Mall A or Mall B, buying a Mercedes or a BMW (the choice is mostly for those lucky few!!), or the investment options available to him, the comparisons are endless and in the process the common man ends up losing his sleep over the correct choice to go with. Talking about investment avenues, the most common and the most discussed comparison is between a ULIP and Mutual Fund. Most argue that ULIPs are nothing more but a combination of Mutual Fund and Insurance Cover which has been launched by insurance companies to lure investors and increase market penetration. Are they right?

While it is true that ULIPs bear certain resemblances with Mutual Funds but comparing them to be equal is foolhardy. Insurers launched ULIPs with a view to enable investors participate in the capital market growth run because the existing insurance products were a long term affair where the returns net of inflation were highly insufficient. With the concept of pooled investments through Mutual Funds, investors reaped the benefit of high returns in trend with the rising inflation and thus insurance sector saw a dwindling of their market share. To cater to the flexible investment and return need of the investors, ULIPs were launched and they quickly became the hot selling insurance products. Ever since their inception, ULIPs have gone through a lot of changes in terms of the charges, liquidity, coverage providedlock-in-period, etc. Thanks to the regulations now mandated by IRDA in accordance with SEBI, ULIPs have undergone a transformation and now are very similar to Mutual Funds. Below is a comparative study of both these products to lay down all debates to rest.

Similarities

Both ULIPs and Mutual Funds pool investor’s wealth and the collected corpus is invested by the fund manager in various stocks as per the return objective of the fund. Returns under both the products are not guaranteed as it depends on the performance of the stocks invested in. Investment can be done either in lump sum or in monthly instalments. Here is where the similarity ends and the differences begin.

Differences

There are many differences which is why I depicted them in pointers. Let us have a look:

1. Benefits – while Mutual Funds only give us the benefit of returns on investments, ULIPs also have a life cover feature which pays Death Benefit on death of the policyholder during the term of the policy.
2. Charge structure – the charges levied under the Mutual Fund Schemes are minimal as there is a one- time entry and exit load and fund management charges. ULIPs on the other hand levy fund management charge, administrative charge, life cover charge, etc. which makes the charges higher compared to mutual funds.
3. Risk and return – ULIPs are less risky products because there are different fund options to choose from and one can also switch between funds to reduce the risk exposure. Mutual Funds do not have different funds and there is no option of switching. As such, the inherent risk is high.

In terms of returns, low risk attracts low returns while Mutual Funds being risky give more attractive returns

4. Lock-in period – all ULIPs have a lock-in-period of 3-5 years during which money cannot be withdrawn and if the policy is surrendered, extra surrender charges accrue. Mutual Funds do not have the lock-in-period clause except certain close-ended funds where the lock-in-period of 3 years is applicable
5. Tax liability –the biggest advantage ULIPs have over Mutual Funds is the exemption in taxation under section 80C & 10 (10D). Both the premiums paid and the benefit received is tax-free. Mutual funds do not enjoy tax exemption except the ELSS Funds which are tax-free.

Remember at the start of the article I used the phrase similar but not identical? ULIPs and Mutual Funds though may appear similar yet there is a huge difference between them. While ULIPs have three benefits of tax saving, life cover and capital appreciation bundled into one, it is more costly, less flexible and yields lower returns. Mutual Funds may give higher returns, are flexible and have low charges, they are taxable and risky. So the choice of investment solely depends on the investor’s perspectives. Keep the above points in mind before you compare between the two products for a secured financial future.