ULIP or MF: Which one is better?

Many of you might have come across insurance agents or even the bank representatives, who may pitch you about a solution, giving investment option along with insurance cover with a fancy name such as wealth builder or wealth creator. Such products are popularly known as unit-linked insurance plans (ULIP). 

The main problem is that people do not completely understand the product before buying it and just go with the rosy picture shown by the insurance agents or the bank representative. Hence, it is important to first understand what ULIP is and then move towards understanding whether it is better than mutual funds or not. 

ULIP is nothing but a combination of investment as well as insurance. Here the policyholder will pay a premium, of which, a small portion would go towards securing your life via insurance cover and the remaining amount is invested in a fund, which is similar to that of mutual funds. Having said, it is a perfect time to bust a myth about ULIPs that they are a bit safer than mutual funds. However, that’s not the case. They are as risky as mutual funds because like mutual funds, they too are market-linked. 

Though in terms of tax treatment, ULIPs are better than mutual funds. However, does it hold true even with their performance? We shall find that out in the coming paragraphs. 

Source: For ULIPs – Morningstar & for MFs – Rupeevest 

If we look at the performance of ULIP as against the MFs, then you can see that apart from mid-cap, in all other spaces, ULIP is in-line with mutual funds. However, a significant thing here to note here is that the performance of ULIP is just a net fund management expense ratio. There are various charges such as premium allocation charges, mortality charges, administration charges, etc. Therefore, the above-mentioned performance is not net charges. However, in the case of MFs, we have assumed regular plans and the performance is net all fees and charges. So, though on paper, the performance of ULIP looks promising as the actual returns that you get are quite disappointing. Moreover, the worst part is that you are not able to cover yourself adequately. Say, in the case of ULIP, for Rs 15 lakh of the sum assured, Rs 1 lakh premium is charged whereas, for a similar sum assured in case of a pure term plan premium hovers around Rs 3,000. The premium of the term plan is calculated proportionately as term plans are not available for such a low sum assured. 

Therefore, we can conclude that investing in MFs and insurance term plan is the bet suitable options for many. However, if somehow ULIPs reduces the other charges that it is imposing now, then it would definitely be an unbeatable option for investors as in that case, you would be getting better returns net fees & charges along with tax efficiency, which is not available with MFs at present.