Salient features of ULIP and Mutual funds

Mutual funds or MF in short are known for their good returns and variety of investment choices, including tax saving schemes.

Unit linked Insurance Plans or ULIP are popular for its triple benefits of life cover, capital appreciation and income tax benefits.

An MF collects money from the public and invests in equity, debt or a combination of both, as per a pre-specified investment objective. Investors are offered units depending on the value of their investment, on a pro rata basis. Equity funds invest to generate growth by way of capital appreciation for investors, whereas debt funds invest in fixed income securities such as bonds, debentures, government securities, reverse repos, etc. A balanced fund invests partly in both equity and debt. A mutual fund scheme can be open-ended (no defined time period) or close ended (three years or five years).

ULIP investment proportion is structured like a mutual fund. The prime objective of this product is insurance and capital appreciation. Accordingly, a part of the premium paid to the company is allocated towards life insurance cover, administrative charges and management fees. The rest is invested in market-linked instruments like stocks, corporate bonds and government securities, depending on the asset allocation plan. Most ULIP offer policy holders a choice of plans, namely equity oriented, debt oriented and balanced too. Policy holders will get units for the amount invested and not on the full premium amount paid. Investor can switch from one plan to another as per the specified number of times.

Tenure:

There is no minimum holding period for most mutual fund schemes, except in the case of tax saving schemes (ELSS) which have a three year lock in period. Close-ended funds, which have a lock in period are either listed on the stock exchange or provide liquidity by accepting redemptions at periodic time intervals (e.g. every three months or six months).

ULIP have a minimum tenure of 5 years and the maximum term depends on the age of the investor. These are also subject to a lock-in period of three years before which an investor has no access to the investment amount.

Mutual funds usually give better returns on investment than ULIP since a larger portion of investor contribution is invested in securities. The returns vary with the investment pattern. For example debt schemes are presently offering on an average basis, annualized returns of 3 to 8%, whereas equity oriented schemes are presently offering returns in the range of 30 to 60% per annum. ULIP charge higher expenses as a percentage of investment than MF – the amount available for investment reduces to that extent. Life insurance cover charges and other expenses are factored into the ULIP premium. Since the base for investment is lower, the returns offered by ULIP will mostly be lower than those on mutual fund schemes

Redemption procedure:

MF: The redemption amount is calculated by multiplying the Net Asset Value (NAV minus exit load, if any) on the date of redemption with the number of units redeemed. Mutual fund investments are highly liquid. The redemption amount is received within 1 to 3 working days based on scheme type.

In the case of ULIP the policy holder can redeem units under any of the following situations:

End of the period on the maturity date of the ULIP.
Surrender: If the investor surrenders policy, the surrender value as stated in the policy after the lock-in period of three years will be received by him.
Death: In the event of unfortunate demise of the investor, his nominee receives the sum assured or the value of the units, whichever is higher.
Partial Withdrawals: Some funds allow partial withdrawal at periodic time intervals. Units will stand reduced to that extent for the holder.