Issuer
ULIP - Insurance Company
Mutual Fund Units - MutualFund**Trust
Objective
ULIP - Life cover, Capital appreciation
MF - Capital appreciation, Regular income
*Tax Benefits
ULIP – Yes for all schemes
MF - Tax benefit only in ELSS
ELSS – Equity Linked Savings Scheme – can avail tax benefitsunder section 80 C
Expenses
ULIP - High Initial charge
MF - **No Entry Load, maximum exit load 1%
Charges of ULIP- Premium Allocation Charge, Risk CoverCharge / Mortality Charge, Policy Administration Charge, Fund Management Charge, Rider Charge, Switching Charge, Service Tax Charge, Miscellaneous Charge, AlterationCharge. These may vary from 25% to 65% depending on the company and the scheme
*Annual charges
ULIP - Typical recurring charges are premium allocationcharge, fund management charge, policy admin charge(IRDA does not stipulate amaximum charge)
*MF - Maximum 2.5% allowed
*Investment Amount
ULIP - Minimum amount is high
MF - Minimum amount is as low as Rs. 500
Portfolio Holdings
ULIP - Regular disclosure not required
MF - Half yearly disclosure requiredMost MFs make monthly disclosure of the portfolio holdings.
Transparency on issues like Cost Structuring, Sum AssuredTerminal Benefits
ULIP - The benefits illustration can be ambiguous andcomplex
MF - The cost structure and exit policy is clear
*Method of Investment
ULIP - Investments only through agents
MF - DirectInvestments possible.After the SEBI circular dated 30/6/2009, the entry loads are now not collected by MutualFunds, thus investments in Mutual Funds can be made through distributors at noextra cost.
*Switching Charge
ULIP - Generally few switches are allowed free of cost
MF - There will be an exit load.
Switching charge is deducted when the customer wishes tomodify asset allocation, say from equity to debt. In case of mutual funds therewill only be an exit load not exceeding 1%. However frequent switching is selfdefeating as it does not justify that ULIPs and MFs are meant for long-term.Further, it would be difficult for an investor to time the markets for aswitch.
Mortality Charge
ULIP - Keeps on increasing each year
MF - Not applicable
Mortality charge is the charge that is applicable to coverthe life risk. This keeps on increasing each year(as you grow older) and thesame is deducted from the number of units invested or from thefresh premiumcollected for the year. Mutual Funds do not typically insure. However some SIPs(Systematic Investment Plans) do provide a group insurance cover. In a termlife policy, the mortality charge(premium in this case) remains the samethroughout the period.
*Surrender Value
*ULIP - Lock in for 3 years. After that the surrender valuemay be much lower than the accumulated cash value.
MF - No lock in except in case of ELSS it is 3 years. Amountis available after paying an exit load if any.(Cannot exceed 1%)
Surrender Value: This is the amount available in cash uponcancellation of a policy before it becomes payable upon death or maturity. Itis a premature withdrawal after lock-in period is over
*Returns
ULIP - Low as compared to MFs
MF – HigherReturns on ULIPs are lower due to high expenses, keeping allother conditions same for fund management.
*Regular Income
ULIP - No such provision.
MF - Dividend payout at regular intervals can provide income
*Time Horizon
ULIP - Benefits only in long term, generally over a periodof 10 years
MF - Products offering short term duration to as long as onewants to remain invested.
Conclusion: ULIPs are very complex products and currently more than 40% of the income of Insurance companies is from this segment. With SEBI removing entry loads in MFs, it would be difficult for Mutual Funds to market their much better products as the intermediaries(the Mutual Fund advisors, Banks, Counsellors etc.) will now try to push ULIPs as higher commissions are available to them. The commissions on Mutual Funds would be too low(only trails) for the mutual fund advisors to survive. Caveat Emptor(Investors beware) ULIPs hide lot more than what you think. Insist on a benefit illustration as per the guidelines provided by IRDA to understand all the charges.