Investor are often confused and do not know the difference between ULIPs and mutual funds. Both of these products can be used to achieve your objectives in life, which could be saving for your child’s education or marriage, accumulating money for your retirement or keeping aside money for the down-payment of your house.
Historically, ULIPs (Unit Linked Insurance Products) have been sold more than mutual funds as they used to earn fat commissions for agents but right now, both of these products seem to be in the dumps, thanks to regulations by SEBI and IRDA, the two regulators who manage these products. Mutual funds are suffering more in fact.
While both ULIPs and mutual funds can be used for goal based investing to save money, it is important to note that both these products are not similar. Here are the differences.
Difference between ULIPs and mutual funds
Complexity
This is a simple one. Mutual Funds are easy to understand products, especially the equity mutual funds ones, if not debt. Compare that to ULIPs, and the difference between ULIPs and mutual funds will seem to be getting complex as ULIPs are structured products with a lot of charges built in.
This is where you can also map these two products to the kind of investor you are.
If you have the financial discipline and are aware of the basics of working of the stock market, then you can invest in MFs. If not, go for ULIPs which mix both insurance and investments. Just note that if you go for the MF route, then pick the best performing mutual funds and that you will also need to cover yourself adequately through a term insurance as a MF will not offer you any protection.
Sum Assured
Well, mutual funds do no have any life cover built into them so there is no concept of sum assured out here. Sum Assured is the money paid out to the policy holder’s family if he dies. So whatever is the market value of the mutual fund, that is paid out immediately upon death.
In ULIPs, on death, either the higher of the fund value of the ULIP and sum assured is paid out OR both the fund value and sum assured is paid out – this depends on what type of ULIP you have. Needless to say, since there is a life cover built into ULIPs, unlike mutual funds, charges towards protection are deducted from ULIPs which isn’t the case in MFs.
Costs
It is common knowledge that there are no entry loads in a MF. In fact, I think this is one of the biggest difference between ULIPs and mutual funds. The only charges which investors incur is a recurring charge on the NAV (Net Asset Value) which a MF is subjected to depending on its type and corpus.
Compare that with ULIPs, there are many charges, some of which get deducted from the premium and others from the fund value. This is precisely why ULIPs are considered expensive in the beginning as most of the charges hit you in the initial few years. This is also the reason why it is advised to stick to ULIPs for a minimum of 10 years before you begin to see some good returns.
Lock ins
When you invest in ULIPs, your money is locked in for 5 years, so this directly affects your ability to pull out the money in case of an emergency.
In mutual funds, there is no lock in except when you buy tax saving mutual funds also called Equity Linked Saving Schemes (ELSS). These get locked in for 3 years so money is not available to you should you need it. But in all the other types of MFs, you can withdraw your money when you need it.
Similarities
While we have dealt with the difference between ULIPs and mutual funds, it should be noted that the similarities are many as well. For example, both these investment avenues can be used to park your money into equity and debt as both of them offer a mix of opportunities to do so.
While in ULIPs, you can switch through a host of funds that are made available, in MFs, you cannot do so as the fund manager controls the allocation of his portfolio.
Not all mutual funds help you save tax, the only ones that do are ELSS. ULIPs on the other hand qualify for tax deduction.
In both these products, you can either invest monthly or in a lump-sum.
Are you aware of any difference between ULIPs and mutual funds or any similarities for that matter which I might have missed here ?
Very good explanation. I think the cost plays very important role, there are just too many charges in ULIPs. Policy administration charges, Premium allocation charges, Mortality charges , Fund management charges, Switch charges, Surrender charges and many more.
Cost is a major factor no doubt Rakesh. You are very right.
Very nice explanation radhey. In sum assured or in similarities you may also include some details on products like Reliance sip insure / ICICI Prudential Sip insure etc. where these mutual fund houses are also offering some kind of insurance coverage.
Yeah there are some MFs out thee which offer insurance cover, maybe I can do another article on them separately.
Reliance sip insure is there for quite sometime but does it make sense to go for this funds just for the sake of insurance? If we check its performance with its peers then it has under-performed. Better to stick to good MF and go with term plans.
Yeah, I think what Mani was saying was that investors need to be aware of these products but don’t have to necessarily go for it for sure.
That’s right. I was just pointing out some additional material for this article. 🙂
I’ve been investing in the ULIPs for last 8-10 years. Now I am seeing my fund value increasing considerably. Should I continue for another 10 years as I can afford to pay? Secondly as I am not a disciplined investor, should I go for ULIPs as there is a strict payment procedure! And lastly can I expect more than 12% return after 20 years?
Thanx for explaining so well.
Easy to understand