ULIPs and Mutual Funds

ULIPs and Mutual Funds

How can ULIPS make you rich?

Despite seemingly comparable structures, there are two different factors.

In this article, we evaluate two methods for specific general parameters and look at the measurement method.

1. Type of investment / investment amount

Mutual fund investors can choose to invest in bulk or to invest in a systematic investment plan (SIP) route with a longer term commitment. The minimum investment amount is set by the fund house.

ULIP investors can also choose premium payments for an annual, half year, quarter or month using a lump sum payment (single premium) or traditional route. In ULIP, determining the paid premium is often the starting point for investment activities.

This is in contrast to traditional insurance plans where the guaranteed amount is the starting point and the premium paid is subsequently determined.

ULIP investors also have the flexibility to change the premium amount during the term of the insurance contract. For example, individuals with access to surplus funds can increase their contribution to ensure that surplus funds are invested profitably. Conversely, individuals facing a liquidity crisis can make less payment (the difference is adjusted by the cumulative amount of ULIP). The freedom to unilaterally change the premium payment obviously gives investors of investment trusts superiority to ULIP investors.

2. Cost

For mutual fund investment, the cost of various activities such as fund management, sales & marketing, management, etc. will be subject to the prescribed upper limit set by the Securities and Exchange Commission of India.

For example, an equity-oriented fund can regularly charge 2.5% of the investor per year for all expenses. Expenses beyond a certain limit are borne by the fund house, not by the investor.

Likewise, funds will also charge investors' deposits / withdrawals (in most cases, one will apply). Entry load is charged at the time of investment and exit load is charged at time of sale.

Insurance companies are subject to the discretion to collect the costs of ULIP products with no limits set by regulatory authorities, ie insurance supervisory regulators. This explains the complex, sometimes "unwieldy" expense structure with ULIP products. The only constraint is that the insurer is obliged to notify the regulatory authorities of all expenses imposed on ULIP offering.

As expenses become higher, the investment amount becomes lower and corpus accumulates, so expenses may have a big impact on investors. ULIP related expenses are dealt with in detail in the article "Understanding ULIP Cost".

3. Portfolio disclosure

Mutual fund houses make most fund houses do monthly, but you need to declare the portfolio legally every quarter. Investors gain the opportunity to see where funds are being invested and how they are managed by studying the portfolio.

There is no agreement on whether ULIP is required to disclose the portfolio. Various opinions on this issue came out during the interaction with leading insurance companies.

While one thinks that it is mandatory to disclose portfolios on a quarterly basis, the other considers that there is no legal obligation and the insurer needs to disclose the portfolio as needed there is.

Some insurance companies declare portfolios on a monthly or quarterly basis. However, the lack of transparency in ULIP investment, given the fact that the amount invested in insurance contracts is primarily intended to provide long-term needs such as contingencies or retirement, Disclosure of a portfolio allows investors to make timely investment decisions.

4. Flexibility in changing asset allocation

As mentioned earlier, the mutual fund segment and the offer of the ULIP segment are almost equal. For example, ULIP and mutual funds plan to invest only in the plan to invest the entire corporate stock (various equity funds), stocks and debt securities (balanced fund) 60:40 dividends, debt instruments (debt funds) only.

If mutual fund investors of diverse stock funds want to transfer corpus to borrowing from the same fund house, he must bear the burden on exit and / or entry.

On the other hand, most insurance companies allow ULIP inventors to shift their investment across various plan / asset classes nominally or at no cost (usually two switches are available free every year, Additional cost switch).

Effectively, ULIP investors can invest in cost-effective ways between asset classes according to convenience.

It turns out that this is very useful for investors. For example, in the bull market where the capital components of ULIP investors were valued, you can post a profit simply by moving the necessary amount to a debt-oriented plan.

5. Advantages of Tax

ULIP investments are subject to deduction under section 80C of the income tax law. This will be kept well, regardless of the nature of the plan selected by the investor. On the other hand, in the field of mutual funds, only investment in saving funds (also called equity-linked savings scheme) is eligible for the benefit of section 80C.

Mature revenues from ULIP are exempt. In the case of equity-oriented funds (eg, various equity funds, balance funds), if the investment is held for more than 12 months, that benefit will be tax exempted. Conversely, investments sold within the 12-month period will attract 10% of the short-term capital gains tax.

Likewise, debt-oriented funds have a long-term capital gains tax of 10% @, but short-term capital gains are taxed at the marginal tax rate of the investor.

Despite the seemingly similar structure, clearly both funds and ULIP have their own advantages. As always, it is imperative for investors to recognize the nuances of both products and make informed decisions.