At the end of every financial year, we often hear people talking about tax ...
You have gone through tons of advice and inputs on investments and now finally made up your mind to start investing. You’ve worked out the annual investment amount, the duration of savings and now the only question left is which financial product to avail? Should I invest in ULIPs, Mutual Funds/SIPs or both?
Well, it completely depends on your need and outlook. This has been a popular debate ever since unit linked insurance plans took the limelight. Plainly put, if you are looking for a pure “investment” product, then Mutual Funds would serve the purpose and if you are looking at protection for your family along with reaping the maximum benefits from your investment according to your risk profile, then ULIPs can do the job.
Unit Linked Insurance Products (ULIPs) are primarily insurance products and they should not be confused with an investment product like a Mutual Fund. The returns from an ULIP could be substantially low when compared to Mutual funds over the same horizon. This is because the Internal rate of Return (IRR) for Insurance Products would surely be less than the Internal Rate of return for an Investment Product. And this is because the objectives of both the products are very different from each other.
The primary objective of an insurance product, be it a ULIP or an Endowment Plan, is to offer risk cover. Offering benefits of Investment is and will always second in priority in all Life Insurance products. However, for an investment product like Mutual Fund, the primary objective is returns.
Advantages of ULIPs
Many people doubt the concept of a unit-linked insurance and ask if ULIPs have any advantage at all! Well, to answer such questions, ULIPs surely have their set of benefits. Some of the benefits of ULIPs are –
- Transparency on your investment portfolio
- Regular and Convenient tracking of your fund value at any time
- Flexibility to choose your life cover and change your premium amount
- Option to alter/change your asset allocation
- Tax Benefits
ULIPs V/S Mutual Funds
Even today, ULIPs account for a major chunk of the total business of many life insurance companies. But the fact remains, that ULIP is very similar to a mutual fund in terms of its structure and the way it functions. There are many ways where ULIPs are actually better than Mutual Funds. Let us see some of the points:
1. Risk Cover - In ULIPs the policyholder gets an insurance cover from minimum 10 times the Annual premium to a maximum amount determined by the company. This is one of the key points of differentiation between ULIPs and Mutual Funds.
2. Add-on covers - In ULIPs, there are additional benefits like Critical Illness cover and Accidental Benefits can be purchased along with ULIPs. However the same cannot be purchased with Mutual Funds. Since Mutual Funds are pure investment products, it doesn’t have any protection facilities like Critical Illness Benefit and Accidental Benefits.
3. Tax Benefit on Premiums paid - There are no Tax Benefits under the regular Mutual Funds. Only a few tax-saving mutual funds and ELSS (Equity linked Savings Scheme) provide tax benefit under section 80C. Whereas all ULIPs provide tax benefit under section 80C. The premium paid till Rs 1 lakh per annum is tax free under section 80C.
4. Tax exemption on Maturity proceeds - Maturity Benefit of ULIP is also tax free under section 10(10)D provided the investment is kept for a period of 5 years and Sum Assured is minimum 5 times the annual premium in all those years. The maturity benefit is never tax free for Mutual Funds. It always becomes taxable in the hands of the investor.
5. Investment style - Mutual Fund investment is very objective-oriented like Natural Resources Fund, Gold Fund, etc. Thus, if the particular fund objective does not work, i.e. the Natural Resources do not give the desired result then the investor is directly impacted. Whereas the investment style in ULIP is not objective-oriented and therefore such a fear of direct impacxt doesn’t exist. The Fund Managers in Insurance companies can choose to invest wherever they feel like such that maximum returns are achieved.
6. Loyalty Additions - In some ULIPs, there are Loyalty Units additions. It means the insurance company pays the policyholder some additional units for continuing to pay the premiums for a long time. However, there is no such facility that is available with Mutual Funds.
7. Portfolio management – ULIPs provide the option to the policyholder to manage his/her funds. The policyholder has an option to change the allocation of his past and future investments during the policy period. Premium Redirection and Switches are provided free for a certain number of times in a year with ULIPs and not so with Mutual Funds. There are switches possible in Mutual Funds but only between the same objective funds, however a charge may be charged for each switch.
8. Capital Guarantee – Although this is a recent variant in ULIPs, such guaranteed ulips are gaining popularity. In their reaction to increasing doubts in the customer’s minds, Insurance companies introduced ULIPs with capital guarantee features where the policyholder will be assured the returns at a particular rate of NAV no matter how the market performs during the entire policy tenure. Such kind of guarantee is not offered in mutual funds to the best of my knowledge.
These are some of the benefits of ULIPs over Mutual Funds. Having said that, it is important to know that Mutual Funds also score over ULIPs on many counts such as low cost structure, attractive rate of return, flexibility to redeem prematurely, mandatory portfolio disclosure by the companies, etc. Some people even stretch the comparison to real estate and gold and consider that these are better investment venues. But it is important to understand that every individual has a different risk appetite and financial background.
In a nutshell, ULIPs work better for many people for their ability to offer risk cover, good returns and greater transparency. One should look at ULIP as a hybrid product which tries to offer the best of both worlds – insurance and investment. Hence, it will not be apt to compare ULIPs with a pure insurance plan or pure investment product like Mutual Funds.