Ulips

Everyone likes to see their hard earned money grow quickly. But there are no quick gains. An investment has to be long term in order to be really beneficial. As you make up your mind to invest, make sure you are ready to keep patience. Besides, risk factor is always there to escort your investment. So, you should be absolutely clear in your mind, what you want. Whether it’s Life Insurance Policy, National Savings Certificate or Mutual Funds, all the investment plans have their merits and demerits that you need to consider before you proceed. Unit Linked Insurance Plans are also gaining popularity these days for their investor-friendly profile. 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 cases 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. Likewise 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 interpreted that except the insurance element there is nothing differentiating mutual funds from ULIPs. Unit Linked Insurance Plan (ULIP) and Mutual Fund (MF) are the two most preferred choices for a part time investor to invest into equity. But how do we decide which one should we go for. Even if it is very easy to decide, people are likely to confuse themselves most of the time. This article talks about some points that you need to think while making a decision such as which option we want to take, where to invest, etc. Mutual Funds are pure investments but ULIPs offer you a combination of Insurance and Investment. First question that we need to answer while buying ULIP is - Do I need to buy insurance? · ·

Does the person seeking insurance have any financial liabilities? If something happens to the person, is there someone who can be in a financial crisis? If the answer to the above two question is yes, you need to buy insurance. Comparison Now let us compare ULIP and MF based on certain well known facts:

1. Insurance Cover ULIPs provide you with insurance cover. But MFs don’t provide you with insurance cover. So it is better to prefer ULIPs because in MFs you will get the return only if you contribute during a period. 2. Entry Load

ULIPs generally come with relatively high entry load. For different schemes, this may vary. MFs have a small entry load of a maximum of 2.5%. But now SEBI has banned charging entry load on Mutual Funds. Here MFs have a huge advantage. 3. Maturity ULIPs normally come with a maturity of 5 to 20 years. That whatever money you put in, most of it will be locked-in till three years. Tax saving MF (Popularly called as Equity Linked Saving Scheme or ELSS) comes with a lock-in period of 3 years. Other MFs don’t have a lock-in period. ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that. 4. Tax Saving ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free. But in MF you don’t have any Tax benefit, only if you are investing in Tax Saving MF you will get the Tax Benefit. But here it has a lock in period of minimum 3 years. 5. Market exposure ULIPs give you both modest and aggressive exposure to equity market. ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep more that 60% of their funds in equity market. ULIPS also allow you to change your equity market exposure. Thus it can help you to time the market and still give you tax savings. 6. Flexibility of time of redemption ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty. In ELSS premature redemption is not allowed. For an open ended scheme one can redeem the MF anytime. This is mainly useful if the market is down at any time. In case of ELSS you can wait till the market comes up again and then redeem them. In spite of 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 work. 1. 2. 3. 4. 6. 7. 8.

Features of ULIP Medium Term to Long Term Investments Fund Management Expenses will be less (1.5%) Entry load will be high Insurance Maturity Amounts are Tax Free in the hands of the investor (In India) In General ULIP Products has min of 3 years lock in period Value based investment Investor who would like to protect his life / health and also make some money, can invest in ULIP

How ULIPs can make you RICH….!!! ULIP can be a very good instrument to invest in, if you are willing to stick to it for a long period of time — in the range of 10 to 20 years. If you have a short span of time at your disposal, it is better to invest in Mutual Funds and buy term plans to take care of your insurance coverage. The main difference between ULIP and Mutual Funds is variation in expenses — administrative charges, mortality charges and, of course, fund management fees. We are going to compare ULIP and Mutual Fund to suggest that, over a longish period, ULIP's expenses work out to be lower than that of an equity Mutual Fund, and so you end up getting more of your money to work for you. Since insurance companies charge high selling expenses in the first year's premium, short-term investors stand to lose. But, if one were to analyse the benefits of ULIPs over mutual funds, all else being equal, there may be reason to look at ULIPs, purely because of the lower expense ratio: The Fund management charge (FMC) of insurance companies is 1.5%, whereas in the case of mutual funds it is around 2.5%. Therefore, in the longer term, when the funds of individual investors under management become large, the difference of 1% matters a lot. It counterbalances the higher charges taken by insurance companies during the earlier period of the fund. From the below given illustration you can clearly understand the performance of both ULIP and Mutual Fund. Some of the Best Performing ULIPs in the Industry Below given table will show you the returns of some of the best performing ULIPs in the market for the Company Fund 1 Year 2 Year 3 Year last three Birla Sun Life Creator 27.1% 17.2% 18.5% years. Birla Sun Life Balancer 23.5% 15.4% 14.4% ICICI Prudential Balancer II 12.8% 9.8% 12.8% Life HDFC Life Balanced Managed 11.5% 7.4% 12.1% Birla Sun Life Enhancer 15.5% 9.8% 11.7%

Some of the Best Performing MFs in the Industry Below given table will show you the returns of some of the best performing MFs in the Plan Name Can Robeco Equity TaxSaver (G) UTI Opportunities Fund (G) Birla SL Dividend Yield (G) Reliance MIP (G) Birla SL MIP II-Savings 5 (G) market for the last three years.

1 Year 19.1% 16.6% 19.0% 25.2% 19.8%

2 Year 6.4% 10.5% 4.1% 14.1% 14.8%

3 Year 19.0% 14.9% 13.2% 12.2% 12.4%

Below given example will help you to understand the growth of money in both ULIP and Mutual Funds. In this example we are assuming that you are investing Rs. 10000 every year in MF and ULIP. We have assumed the return on ULIP and MF as 14%. In ULIP, Fund Management Charge (FMC) is 1.5% but in MF it is 2.5%. Apart from that ULIPs will charge a Premium Allocation Charge on your investments; it differs from plan to plan. In this example we have considered it as 10% for the first and 2% thereafter. Returns from ULIPs This table will provide you information about the growth of money invested in ULIP during a period of 20 years. Provided you are making an investment of Rs.10000 every year. Assumptions: · Annual Investment – Rs.10000 · Rate of Return – 14% · Fund Management Charges (FMC) – 1.5% · Premium Allocation Charges: § 1st year -10% § 2nd year onwards – 2%

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Return after 5th year = 68885.11 Return after 10th year = 193292.28 Return after 15th year = 415393.45 Return after 20th year = 811905.36 Return from Mutual Fund Below given table will help you to understand the return on investments from Mutual Funds over a period of 20 years, provided you are investing an amount of Rs.10000 every year.

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Assumptions: Annual Investment – Rs.10000 Rate of Return – 14% Fund Management Charges (FMC) – 2.5% Premium Allocation Charges – 0%

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Return after 5th year = 69428.83 Return after 10th year = 187213.06 Return after 15th year = 387031 Return after 20th year = 726017.05

Analysis of Return Category 5th Year 10th Year 15th Year 20th Year ULIP 68885.11 193292.28 415393.45 811905.36 Mutual Fund 69428.83 187213.06 387031 726017.05 Difference 543.72 6079.22 28362.45 85888.31 th According to the illustration given above, in 5 year MF has generated Rs. 543.72 more than ULIPs. But from 7th year onwards ULIPs will give you more returns. In the 10th year ULIPs will give you Rs. 6079.22 more than MFs. In the 15th year it is Rs. 28362 more and in 20th year it is Rs. 85888.31 more than FD. Graphical representation of Returns on ULIPs and Mutual Funds From the below given graph you can clearly understand the performance of ULIP and Mutual Fund over a period of 20 years.