InvestorQ : What is better ULIPs or mutual funds?
shivangi Arora made post

What is better ULIPs or mutual funds?

Answer
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AR Kadam answered.
4 weeks ago


You can create a much better cost efficient ULIP using Life Insurance Term Cover & Mutual Funds.

Please consult your Financial (Insurance and Investment) Advisor for selection of Insurance Co. and Mutual Fund Schemes.


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Dawn Cherian answered.
4 weeks ago


Well, this question is a never-ending debate and there can be huge differences in my perspective and someone else’s. So, there are several factors on which we can compare the two:

1) Return Analysis:

In ULIPs the returns vary according to age. Say, for an investor who is 35 years old returns would be higher as compared to the one who is 40 years old.

Let’s assume that total investment under ULIP and mutual fund both is Rs. 24 lacs and both will replicate the performance of Nifty 50 TRI. Under this case, for entry age 30 ULIP tax-free maturity proceeds would be Rs 85.34 lacs and for age 55 tax-free maturity proceeds would be Rs. 81.86 lacs. 

However, mutual funds do not have any age bar but may have different expense ratios. For a mutual fund with an expense ratio of 0.25% after-tax proceeds for a 20-year investment will 95.99 lacs and for an expense ratio of 1.50%, it would be 80.43 lacs. 
Therefore, mutual fund data is better than that of ULIPs even after applying long-term capital gain of 10%.

2) Cost:

Under ULIPs, IRDAI caps the fund management charges at 1.35% p.a. plus GST. However, for mutual funds, the expense ratio varies between 0.25% to 1.5%. One can choose a lower expense ratio fund as it would be more beneficial. Therefore, ULIP loses the round here as well.

3) Other factors:

-Portfolio disclosures in mutual funds are better as AMCs are required to disclose full portfolios every month. Whereas, there is no such requirement under ULIPs and there is no surety about the frequency and quality of disclosures under that.

-In ULIPs, you cannot exit an underperforming fund, all you can do is switch between ULIPs or exit the ULIP completely. Now, ULIP has a lock-in period of 5 years and if you move to a new ULIP, the countdown of 5 years begins again.

-ULIP have certain products that meet the requirements of investors and relate with them, so that becomes a catch for ULIPs.

-Secondly, you can switch between ULIP fund without any tax impact which is not possible under mutual funds are every time you switch between funds, it shall be treated as the sale of shares and hence, capital gain.

-Therefore, the positives of mutual funds outnumber the negatives and mutual funds are a clear winner here. The above analysis is based on various assumptions, so the actual results and opinions may differ.