Mutual funds and Unit Linked Insurance Policies [ULIPs] are quite similar in terms of their structure and functioning. In both the cases, investors are allotted units and a net asset value (NAV) is declared for the same on a daily basis.
Just as in the case of mutual funds, ULIP investors have the option of investing across various schemes such as diversified equity funds or balanced funds or debt funds to name a few. Hence we can say that ULIPs are mutual fund schemes having an insurance component.
- Mode of investment & investment amounts
Incase of mutual funds, investors have 2 options - either to make a lump sum investment or take a systematic investment plan (SIP).The fund house lays down the minimum investment amounts.
In ULIPs also investors have the option of investing in a lump sum (single premium) or make periodic payments using different modes of premium payment such as annual, half-yearly, quarterly or monthly basis. In ULIPs, calculating the premium to be paid is often the starting point for the investment activity.
ULIP investors have the flexibility to alter the premium amounts during the policy's tenure. This freedom to modify premium payments as per one's needs definitely gives ULIP investors an edge over their mutual fund counterparts.
- Expenses
Mutual fund investments are subject to pre-determined upper limits for expenses charged for different activities such as administration, fund management, sales and marketing among others. These are prescribed by the Securities and Exchange Board of India [SEBI]
For example incase of equity-oriented funds investors are charged a maximum of 2.5% per annum on a recurring basis for all their expenses. Any expense above this prescribed limit is borne by the fund house and not the investors.
Mutual funds also charge investors entry and exit loads (in most cases, either is applicable) which are charged at the timing of making an investment and at the time of sale respectively.
However in ULIP products insurance companies can levy expenses on investors with no upper limits being prescribed by the insurance regulator, i.e. the Insurance Regulatory and Development Authority [IRDA]. This explains the complex and at times a very high expense structures on ULIP products.
Expenses can have far-reaching consequences on investors as higher expenses translate into lower amounts being actually invested and therefore a smaller corpus being accumulated.
- Portfolio disclosure
Incase of Mutual funds, the mutual fund houses that actually require to statutorily declare portfolios on a quarterly basis, do so on a monthly basis; and hence investors can study their portfolios to see where their monies are being invested and how they have been managed by the fund house/fund manager.
Incase of ULIPs, there is lack of consensus on whether they are required to disclose their portfolios. Some insurers believe that disclosing portfolios on a quarterly basis is mandatory while others hold the opinion that there is no legal obligation to do so unless it is demanded by the investor.
- Flexibility in altering the asset allocation
Offerings available in both the mutual funds segment and ULIPs segment are quite similar. For instance diversified equity funds (plans that invest their entire corpus in equities), balanced funds (60:40 allotment in equity and debt instruments) and debt funds (plans investing only in debt instruments) are found both in ULIPs as well as mutual funds.
Incase of mutual funds, if the investor wants to shift his corpus from a diversified equity fund to a debt from the same fund house, he will have to bear an exit load and/or entry load.
Where as in the case of ULIPs, most insurance companies permit investors to shift investments across various plans or asset classes either at a very nominal fee or no cost (generally, a couple of switches are allowed free of charge every year. Cost has to be borne only for additional switches).
- Tax benefits
Under Section 80C of the Income Tax Act, ULIP investments qualify for certain deductions irrespective of the nature of the plan chosen by the investor. Incase of mutual funds, only investments made in tax-saving funds (also referred to as equity-linked savings schemes or ELSS) are eligible for tax benefits as per Section 80C.
Incase of ULIPs, the maturity proceeds are tax free. In case of equity-oriented funds (such as diversified equity funds or balanced funds), if the investments are held for a period more than 12 months, the gains are tax free; conversely investments that are sold within a 12-months attract short-term capital gains tax @ 10%.
Similarly, debt-oriented funds also attract a long-term capital gains tax @ 10%, and short-term capital gain is taxed at the investor's marginal tax rate.
So we can see that in spite of having seemingly similar structures, both mutual funds and ULIPs have a unique set of advantages to offer. Hence, it is vital for investors to be aware of the benefits and nuances in both offerings before making any investment decisions.
| | ULIPs | Mutual Funds |
| Investment amounts | Determined by the investor and can be modified as well | Minimum investment amounts are determined by the fund house |
| Expenses | No upper limits, expenses determined by the insurance company | Upper limits for expenses chargeable to investors have been set by the regulator |
| Portfolio disclosure | Is Not mandatory* | Quarterly disclosures are mandatory |
| Modifying asset allocation | Generally permitted for free or at a nominal cost | Entry/exit loads have to be borne by the investor |
| Tax benefits | Under Section 80C benefits are available on all ULIP investments | Section 80C benefits are available only on investments in tax-saving funds |
* Incase of ULIPs, there is lack of consensus on whether they are required to disclose their portfolios. Some insurers believe that disclosing portfolios on a quarterly basis is mandatory while others hold the opinion that there is no legal obligation to do so unless it is demanded by the investor.
