ULIPs vs MFs: The best investment

ULIPs vs MFs

Unit-linked insurance products (ULIPs) and mutual funds have always been compared. While some experts think insurance and investment objectives are two different things and rather than buying ULIPs they recommend MFs for investment and term plans for insurance, others prefer ULIPs. Regulators of both industries — insurance and mutual fund — have issued new guidelines related to cost structure. While in MFs, there is no entry load, in the insurance sector, the Insurance Regulatory and Development Authority (IRDA) has capped the maximum cost of ULIPs.

New cost structure

In view of the change in the cost structure, SundayET discusses the issue with experts to find out which of the two is a preferred product and for whom. But first let’s take a look at the new guidelines issued by IRDA. Come October and the new guidelines of the IRDA on the cap on charges on ULIPs, would be implemented. According to the new guidelines, insurance companies are required to put a charge in a way that the difference between the gross yield and net yield should not be more than 3% in case the tenure is equal or less than 10 years. Also, out of this, the fund management charges should not be more than 1.5%. According to a certified financial planner, currently the difference between gross and net yield is over 4% in certain cases.

Gross yield

Gross yield means the overall return and is the difference between the money that an investor invests and that generated by the fund manager. Net yield is the return that an investor gets in his hand after deducting all charges. According to the IRDA guidelines, however, if the policy tenure is more than 10 years, the difference between gross yield and net yield should not be more than 2.25%. Also, out of this, the fund management charges should not be more than 1.25%. Any new product that gets launched from October will have to follow these rules. Also, insurance companies will have to implement these measures for their existing policies. However, they need to do it by year end.

Debt vs equity

According to Malay Ghosh, president at Reliance Life Insurance, the current guidelines aim to ensure that you get a fair deal irrespective of the company and scheme you choose. The guidelines, however, may have a negative impact on the distributors in the short term, but they certainly benefit the existing and new investors of ULIPs, according to K Venkatesh, national head distribution at Geojit BNP Paribas Financial Services. According to Veer Sardesai, MD, Sardesai Finance, a financial planning company, MFs and ULIPs are of two categories : those that invest in debt or fixed income instruments and those that invest in equities. In the equity segment, the capping of expenses of ULIPs at 3% or 2.25% pa makes it costs competitive with equity MFs. ULIPs will also provide insurance. Since this cost involves the mortality charge as well, it could probably be a good product for an older person whose insurance or the mortality charges are higher. You can benefit from lower cost of insurance and get investments managed at competitive costs.

Time frame

However, one must not forget that ULIPs are long-term products. For a shorter duration it is always advisable to go with equity mutual funds as in case of ULIPs, the cost in initial years is relatively much higher. Nevertheless, in case of in the debt segment, the cap on ULIPs remains quite high for a pure debt based fund and in these circumstances a mutual fund will probably be preferred. Currently , many of the mutual fund companies charge fund management of around 2.5%. But as per the recent guidelines of IRDA, insurance companies are allowed to charge not more than 1.5% in case the tenure up to 10 years and 1.25% if the tenure is more than 10 years. However, though the recent developments are expected to benefit investors but mutual fund and insurance companies are yet to come out with new funds and policies under the new rules. According to Sardesai, one will have to pursue the new ULIP policies and the new MF documents, once they are launched, before concluding which of the two is the preferred product.

Source:economictimes.com