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Ulips Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of

their structure and functioning. As is the case with mutual funds, investors in ULIPs are allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few. Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component. However it should not be construed that barring the insurance element there is nothing differentiating mutual funds from ULIPs. How ULIPs can make you RICH! Despite the seemingly comparable structures there are various factors wherein the two differ. In this article we evaluate the two avenues on certain common parameters and find out how they measure up. 1. Mode of investment/ investment amounts Mutual fund investors have the option of either making lump sum investments or investing using the systematic investment plan (SIP) route which entails commitments over longer time horizons. The minimum investment amounts are laid out by the fund house. ULIP investors also have the choice of investing in a lump sum (single premium) or using the conventional route, i.e. making premium payments on an annual, half-yearly, quarterly or monthly basis. In ULIPs, determining the premium paid is often the starting point for the investment activity. This is in stark contrast to conventional insurance plans where the sum assured is the starting point and premiums to be paid are determined thereafter. ULIP investors also have the flexibility to alter the premium amounts during the policy's tenure. For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP). The freedom to modify premium payments at one's convenience clearly gives ULIP investors an edge over their mutual fund counterparts. 2. Expenses

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India [ Images ]. For example equity-oriented funds can charge their investors a maximum of 2.5% per annum on a recurring basis for all their expenses; any expense above the prescribed limit is borne by the fund house and not the investors. Similarly funds also charge their investors entry and exit loads (in most cases, either is applicable). Entry loads are charged at the timing of making an investment while the exit load is charged at the time of sale. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority. This explains the complex and at times 'unwieldy' expense structures on ULIP offerings. The only restraint placed is that insurers are required to notify the regulator of all the expenses that will be charged on their ULIP offerings. Expenses can have far-reaching consequences on investors since higher expenses translate into lower amounts being invested and a smaller corpus being accumulated. ULIP-related expenses have been dealt with in detail in the article "Understanding ULIP expenses". 3. Portfolio disclosure Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio. There is lack of consensus on whether ULIPs are required to disclose their portfolios. During our interactions with leading insurers we came across divergent views on this issue. While one school of thought believes that disclosing portfolios on a quarterly basis is mandatory, the other believes that there is no legal obligation to do so and that insurers are required to disclose their portfolios only on demand. Some insurance companies do declare their portfolios on a monthly/quarterly basis. However the lack of transparency in ULIP investments could be a cause for concern considering that the amount invested in insurance policies is essentially meant to provide for contingencies and for long-term needs like retirement; regular portfolio disclosures on the other hand can enable investors to make timely investment decisions. ULIPs vs Mutual Funds ULIPs Mutual Funds

Minimum investment Determined by the amounts Investment amounts investor and can determined be modified as well fund house No upper limits, Upper expenses to investors have been set by the regulator Quarterly disclosures Portfolio disclosure Not mandatory* Generally permitted for free Entry/exit loads have Modifying allocation asset or at a nominal to be borne by the cost Section benefits available Tax benefits on investor 80C Section 80C benefits are are available only on all investments in taxare mandatory limits for by are the

expenses insurance Expenses company

determined by the chargeable

ULIP investments saving funds

* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.

4. Flexibility in altering the asset allocation As was stated earlier, offerings in both the mutual funds segment and ULIPs segment are largely comparable. For example plans that invest their entire corpus in equities (diversified equity funds), a 60:40 allotment in equity and debt instruments (balanced funds) and those investing only in debt instruments (debt funds) can be found in both ULIPs and mutual funds. If a mutual fund investor in a diversified equity fund wishes to shift his corpus into a debt from the same fund house, he could have to bear an exit load and/or entry load. On the other hand most insurance companies permit their ULIP inventors to shift investments across various plans/asset classes either at a nominal or no cost (usually, a couple of switches are allowed free of charge every year and a cost has to be borne for additional switches). Effectively the ULIP investor is given the option to invest across asset classes as per his convenience in a cost-effective manner.

This can prove to be very useful for investors, for example in a bull market when the ULIP investor's equity component has appreciated, he can book profits by simply transferring the requisite amount to a debt-oriented plan. 5. Tax benefits ULIP investments qualify for deductions under Section 80C of the Income Tax Act. This holds good, irrespective of the nature of the plan chosen by the investor. On the other hand in the mutual funds domain, only investments in tax-saving funds (also referred to as equity-linked savings schemes) are eligible for Section 80C benefits. Maturity proceeds from ULIPs are tax free. In case of equity-oriented funds (for example diversified equity funds, balanced funds), if the investments are held for a period over 12 months, the gains are tax free; conversely investments sold within a 12-month period attract short-term capital gains tax @ 10%. Similarly, debt-oriented funds attract a long-term capital gains tax @ 10%, while a short-term capital gain is taxed at the investor's marginal tax rate. Despite the seemingly similar structures evidently both mutual funds and ULIPs have their unique set of advantages to offer. As always, it is vital for investors to be aware of the nuances in both offerings and make informed decisions.

ULIPs and mutual fund are similar type of investment but not same. As we know mutual funds are more into investments; whereas ULIPs are into investments as well as insurance. When we look into the basic concept the difference between the two is very small, and mainly consists of product structure and risk coverage. The basic difference evolves regarding its regulation. The ULIPs are regulated by the IRDA, whereas mutual funds are regulated by the SEBI. Then the other important aspect is when we look from an industrial point of view, the main focus of mutual funds is on low costs while the main focus for the ULIPs lies in the better performance and the distribution of its products. The other aspect includes flexibility, in this case a ULIP allows us to increase our life cover and at the same time are premiums rates remain the same. This is achieved by reducing our investments. On the other hand you dont get any life cover in mutual funds. The only option we are left is purchasing a new insurance policy which would ultimately lead to additional cost. The other important point to be focused involves that even if the costs of the investments in ULIPs is more compared to Mutual funds, the ULIPs offer better products which are suited for long term investments, whereas mutual fund products can only be used for sole purposes or

short term returns. And one more point which acts as a beneficiary in terms of insurance is, that we do not receive any insurance cover in mutual funds whereas we receive insurance cover in ULIP plans. Mutual Funds and ULIPs both are subject to market risks; if something unfortunate happen to investor, family or nominee will receive only fund value. On the other hand ULIPs will give your family guaranteed sum assured in case of death of the policy holder. As these investments are the most preferred investment options to invest. even a small drawback somewhere makes a strong impression in our minds. So in the case of ULIPs vs Mutual funds if we notice, ULIPs are more preferable even if both stand at the same level. Somewhere when we equate both the investment options ULIPs are more beneficial as well as flexible as per our requirements.

Difference Between ULIP and Mutual Fund


Unit Linked Insurance Plan (ULIP) and Mutual Fund (MF) both are investment options but most of the people are confused whether to choose ULIP or MF. Many people are purchasing ULIP as it covers insurance as well as investment. Another main reason people buying ULIP is because of its agents. For mutual funds, there will be less advertisements, less agents and of course less pressure to take compared to ULIPs. Here we will see some differences between ULIP and MF.

ULIP is combination of insurance and investment but Mutual Fund is purely investment. ULIPs are quite expensive as they recover the various charges such as premium allocation charges, fund management charges, policy administration charges, morality charges etc., Allotment of your premium into investments happens once these charges are deducted from the premium. It is the same case with Mutual Fund but the costs are low. For example: Let us say your premium is Rs.10,000. Some charges like Morality Charges are deducted for your insurance cover, lets say Rs.1,000. The agent who sold the premium to you will get 25% of your first premium, lets say Rs.2,500. Now, your premium cost left for investment will be Rs.6,500. If (Net Asset Value) NAV of the fund rises, let say 30% in the first

year, your portfolio worth will be Rs.8,450, not even equal to your premium. Whereas in MF the total amount is invested. However, transaction fees are applicable Rs.30 or 1.5% of amount invested per transaction whichever is lower. Earlier, charges called Entry Load of 2.25% used to there for Mutual Funds, but from 1st August 2009, they are removed. ULIPs are lock in period of three years and partial withdrawal is allowed after 3 years, whereas in MF there will be no lock in period except for tax saving schemes. Minimum monthly investment available in MF is Rs.500 where as in ULIP the premium will be more than Rs.1,000 per month.

If a person really needs insurance with low cost, it is better to choose the term insurance with low cost and get high premiums and if the same person also needs investment, it is better to choose the Mutual Fund. Financially it is not good to choose the combination of insurance and investment. Insurance is different from investment.

A very common question among investors which instrument is better Ulips or Mutual Funds. Before you start thinking which instrument to invest, lets first understand these two financial instruments. What are ULIPs Unit Linked Insurance Plans Popularly known as ULIPs, it is an investment option provided by Insurance Companies. It is a single contract comprising of insurance cover with an investment benefit. The insurance company allots units to the ULIP investors and the net asset value (NAV) is calculated and declared on a daily basis. An investment in ULIP is divided into two parts a) Life Cover Premium b) Investment. Premium paid in ULIP, certain portion goes for life cover and the remaining portion goes for investment. What is a Mutual Fund Mutual Fund is an investment instrument which pools money from many investors and invest in (stocks, bonds, money market instruments). The mutual fund company allots units to the mutual fund investors and the current value of such investments is calculated on a daily basis and the same is declared through the Net Asset Value. ULIPs vs Mutual Funds The basic difference between ULIP and Mutual fund is in terms of insurance cover. A ULIP provides a insurance component whereas a mutual fund is a pure investment product. Generally speaking, ULIPs are mutual funds with an insurance cover.

ULIP = Mutual fund + Insurance cover Now after understanding the difference between ULIP and Mutual funds, lets understand in detail which is better investment option ULIP or Mutual Funds. Parameters for comparison ULIPs vs Mutual Funds

a) Ulip vs Mutual Fund Expenses


Expenses incurred in a Mutual Fund is lesser than the expenses of ULIPs. The reason is expenses in a mutual fund is capped, there is a pre-set upper limit, whereas for ULIPs no upper limit in terms of controlling the expenses is set by the insurance company.

b)Ulip vs Mutual Fund Tax benefits


Any investment made in ULIP qualifies under section 80C of income tax act, where an investor can save tax on Rs 1,00, 000. In case of mutual funds, only investment in ELSS (equity linked tax savings scheme) a specific type of mutual fund scheme qualifies for tax benefits under section 80 C.

c)Ulip vs Mutual Fund Portfolio disclosure


Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, however there is no such statutory requirements for ULIPs.

d)Ulip vs Mutual Fund Return on investment


As both the products are long term investment products, these products have given good returns to its investors. Many analysts feels, from a long term view ULIP provides better return than mutual funds. However this is not true in all cases, it all depends on the type of investment and the fund managers skills in managing the funds. Considering all the above factors, a mutual fund investment is better than ULIPs. Insurance is meant for your future protection and it takes care of uncertainties in the future. However a mutual fund is meant for only investment. As we investors do not have the expertise to invest in the stock market and other financial instruments, through mutual funds it is possible. What is the best investment option? ULIP vs Mutual Fund The best investment option available for anyone is A low-cost term insurance (Insurance) and the remaining amount should be invested in a diversified equity mutual fund.

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