By Puneet Oberoi
The debate of ULIP vs mutual funds has started again after the introduction of Long Term Capital Gains Tax on equity mutual funds . Many investors want to know which one is a better investment option- mutual funds or ULIP ?
Firstly, why are we even comparing an investment product with an insurance product ? They are absolutely different products in nature. I am not going to start a debate of insurance versus investment. Moreover, each product has its own advantages and disadvantages. Not every product is made for everybody.
If we talk about ULIP , it is a good product for people who need insurance and investment and who can’t take higher covers through term insurance. But in terms of investment, I don’t think ULIPs are comparable to mutual funds .
Some insurance companies have started pitching ULIPs against mutual funds after the re-introduction of LTCG tax . Before we get into the calculation part, here are the basic differences, the pros and cons of both these products. Investors have to see which one suits them fundamentally, before judging them on the basis of returns.
- Allocation charges – Ranges between 2- 5 per cent annually
- Policy Administration charges – anywhere between Rs 700 – 1,000 per annum.
- Mortality charges – ranges from 1 to 12 per thousand sum insured. ( which is very high in higher age groups) .
- Can not be withdrawn before five years .
- Discontinuation charges before five years , ranging between 2- 6 per cent
- They avail a benefit of tax free maturity under section 10(10)d.
- They have free switches without paying any taxes short term gain / long term gains
- It is only beneficial if you want it for at least 10 years +
- You are bound with one fund house and its performance , can’t move out
- No Allocation Charges . 100 per cent invested in markets
- No Administration charges
- No Mortality charges
- Flexible, as you can redeem at any time subject to capital gain and exit load before one year .
- LTCG 10 per cent and STCG 15 per cent
- Switch is counted as redemption and is subject to capital gains
- It is beneficial and beats ULIPs in short term of 5 to 6 years .
- You can have multiple options and you can change funds if its not performing .
In long term even after paying long term capital gains in mutual funds , the returns come out the same . At the end of 10 years, the mutual fund would make around Rs 1.75 crore. After paying a long term capital gains tax of 10 per cent, you will have a net return of Rs 1.67 core. The ULIP would offer slightly better return of Rs 1.69 crore. (See Table)
For this we have taken an example of one of the insurance company and one mutual fund , giving out same returns of 12 per cent for 10 years .