I have been a firm believer in not mixing investment with insurance. Since ULIPs (Unit Linked Insurance Plan) can offer a maximum cover of ten times the premium, it would cost you an enormous amount of money to provide the amount of life cover you actually need. Ever since the LTCG tax was announced in the Budget, I have come across various articles by insurance companies highlighting the tax-free nature of ULIPs. The taxability of income is only one part of the investment decision & not the only parameter on which an instrument should be judged. For example the mortality charges levied by ULIPs reduce the net investment of the policyholder.
Insurance companies argue that mortality charges should not be taken into equation because it provides life coverage to the policyholder. Even if we keep aside the mortality charges and look at the NAV-based returns only, mutual funds score over ULIPs. Historically ULIP returns have been 100-300 bps lower than those of mutual funds. The average large-cap ULIP fund grew 15.51% in the last one year whereas the average large-cap mutual fund rose 18.83%. This gap in performance can have a big impact in the long run of 15-20 years. By nature mutual funds are better placed to manage investments. Insurance companies are more adept at risk management and protection.
An ULIP is a multi-year commitment. The buyer has to keep paying the premium for the full term of the plan. Also, investing in an ULIP is like buying a closed-ended fund that will mature in 15-20 years & investors are stuck with the same insurer and policy for the full term. In contrast, there are no such constraints on a mutual fund investor. He can easily shift from a poor performing scheme to a better fund, exit anytime he wants or remain invested for the long term or make partial withdrawals or additional investments easily.
Mutual funds are widely tracked by several agencies and websites. NAVs are tracked & compared on a daily basis. Investors can check their portfolios in monthly factsheets published by mutual funds, find out their allocation to sectors, market segments and even individual stocks. ULIPs also offer the same information, but they are not so widely tracked and very few investors would know which the best performing ULIP fund is.
The structure of ULIP charges is a bit complicated. Some of the charges are not built into the NAV but levied during cancellation of units. In contrast, mutual funds are fairly transparent on charges. The expense ratio is built into the NAV and there is an exit load if the investor redeems before a minimum holding period.
While both mutual funds and ULIPs are long-term investments, mutual funds are relatively liquid. An investor can exit any time he wants, and even make partial withdrawals if required. ULIPS have a five-year lock-in period, after which partial withdrawals can be made. Only ELSS (Equity Linked Savings Scheme) mutual funds have a lock in period of 3 years for tax benefit. The good thing is that currently there are no surrender charges after five years in ULIPs.
If you are already invested in mutual funds and your KYC is done, you can invest online in any mutual fund without any additional paperwork. ULIP investors on the other hand don’t have that luxury. Even after filling up the form online and making the payment, the paperwork needs to be completed offline. This can include medical tests and even scrutiny of income tax return of the individual if he has sought a very large life insurance cover.
Mutual funds offer a wider choice to investors. Those looking for stable growth can go for large-cap funds while more adventurous investors can invest in mid-cap and small-cap schemes. Flexi-cap funds give you the best of both worlds. Some insurers offer a wide bouquet of ULIP funds, but mostly the choice is between equity, debt and liquid funds.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’