Factors which makes Mutual Funds better option than ULIPS

Since LTCG (Long term capital gain) tax was re-introduced in the Union Budget 2018, many insurance companies have been highlighting the tax-free nature of ULIPS. But the tax incentive should not be the sole factor to take a investment decision. There are some other factors where mutual funds are the best bets instead of ULIPs.

Costs

ULIPs post 2010 has also became cost efficient like mutual funds, but still it is very difficult to understand the expenses of ULIPs which makes it bit inconvenient for investors. In the case of mutual funds all the costs are bundled in one total expense ratio (TER), which is collected evenly over the years and is reflected in the net asset value (NAV). In the case of ULIPs costs come under different costs heads. Like premium allocation charge which is a straight deduction from the premium that investor pays. Moreover, mortality costs and policy administration costs are deducted by cancelling the units.

Returns

Returns have the biggest impact on the investment decision of the investor. Mutual funds have steadily delivered better returns in the longer horizon over ULIPs. In the last one year, Equity large cap ULIPs have given an average return of 16% where Mutual funds offer 130 bps higher returns on large cap funds. The average returns from the all categories of mutual funds is around 14% in last one year where ULIPs average returns of all the categories is nearly 8%. This implies that mutual funds generate more wealth to the investors.

Flexibility

Mutual funds are more flexible instruments than the ULIPs. An investor can enter and exit the mutual fund scheme any time. If he is exiting in the shorter term, the investment is eligible for the STCG (short term capital gain) tax of 15% and attracts an exit load. On the other side, ULIPs are multi-year commitments where investor cannot exit at will. The investor has to pay the premium till the tenure of the plan opted.

Transparency

In the case of transparency too mutual fund score over ULIPs. The information regarding the mutual fund holdings, its asset allocation, NAV’s are easily accessible. ULIPs also disclose the same kind of information, but it is not tracked by many agencies so the information of ULIPs is comparatively less accessible. Moreover the cost structure of ULIPs is bit complicated than that of mutual funds. Some of the charges of ULIPs are not reflected in NAV but levied by cancellation of units.

Liquidity

Mutual funds are more liquid in nature than ULIPs. The ELSS, a tax saving category of mutual funds carry a lock-in period of 3 years otherwise all other mutual fund schemes are liquid in nature. An investor can exit any time from the schemes. On the other hand, ULIPs have a lock-in period of 5 years after which investor can make partial withdrawals.

With the all above factors it is very clear that mutual funds are far better than that of ULIPs except tax-free nature mutual fund is beneficial in all terms like liquidity, returns and costs than ULIPs. So investor should consider all these aspects too while taking an investment decision between ULIPs and mutual funds.