Are Mutual Fund and ULIP the same thing?


Mutual Fund or ULIP? Many of us have this question in mind. This resource will help you to understand the difference between Mutual Fund and a ULIP.

Often we face the question "Which is better? Mutual Funds or ULIPs?" If we observe there are lot many similarities between an ULIP and Mutual Fund (MF). Performances of both the instruments are 'subject to market conditions'- meaning both carry the upside market potential and the downside market risk (which is why the sales literature's of both say "Investment risk is borne by the investor").

Let us find out the similarities between ULIP and Mutual Fund.

1. Investment to the both is subject to the Market Risk.

2. 'Units' are the basis of calculation in both.

3. Performance of the both is judged by the value of 'NAV'.

4. There is no definite 'assured' amount which the investor is supposed to get
on maturity.

5. Both are subject to Fund Management Charges.

6. Both consists a basket of Fund of similar nature (for e.g. Index Funds, Diversified equities, Debt Funds etc)

7. Both offer switching options.

The above listed similarities may prompt us to conclude that 'MF and ULIP are the two sides of the same coin'. As we progress further in the discussion, a detailed examination of the same would reveal a different picture.

Let us now try to list the common 'accusations' that ULIPs face over MFs.

1. ULIPs have a heavy entry charges.

2. Other charges under ULIP are very high.

3. There is low liquidity with ULIP.

4. The returns under ULIP are less.

5. Early redemption is subject to heavy surrender charges.

First and foremost, let us try to understand that ULIPs are not a substitute to Mutual Fund. (And vice-versa). The objectives served by both of them are different. For example, an orange and sweet lime may 'look' the same but they 'taste' different. Similarly, the construct of an ULIP and MF may be some what same but they serve different purposes.

In our subsequent discussion we will see that wealth creation through ULIP in the long run is not only advantageous in terms of the Fund Value it offers us at the time of Maturity, but also in terms of the financial protection it offers to our family-if in case we are not there.

Let us take a look at few characteristics of ULIPs which make them stand apart from the commonly sought avenues of investments such as Mutual Funds:

1. ULIPs generally have a lower Fund Management Charge when compared to most of the Mutual Funds.

2. ULIPs offer Automatic Asset Allocation (in Bajaj Allianz Life Insurance 'Wheel of Life Portfolio Strategy' is an example) advantage to beat market volatility.

3. Creating an Encumbrance Free Estate with The Married Women's Property Act provisions.

4. With a ULIP you don't have fear that your policy will lapse if you were unable to pay your premium (subject to payment of 3 years of premium in general)

5. Facilitates protecting family lifestyle – meeting all possible eventualities whether we 'are' there or 'not' there.

6. An ULIP will give you flexibility of increasing your life cover, while maintaining the same premium.

Let us now take an example to understand the kind of Fund Values both can offer us if we continue to invest in ULIP and in MF.

'A' invests Rs. 5000 every month in a Mutual Fund which has no entry load (i.e. 100% allocation). The Fund Management charge of the Fund is 2.25%. A will continue to invest for a period of 20 years.

'B' invests Rs. 5000 in Bajaj Allianz New Unit Gain every month which has an allocation of 45% in first year, 96% from 2nd year to 5th year, and 98% from 6th year to 13th year and 100% thereafter. He chooses 'Wheel of Life Portfolio strategy' offered under the plan. Moreover, he chooses a Sum Assured of Rs. 300000 (which is the minimum guaranteed death benefit.)

Apparently, it may seem that the investor A, investing in the MF with a 100% allocation all through would emerge as the winner. Let's see. The cash flows of A (assuming a gross return of 10%)








The cash flows of A (assuming a gross return of 10%)The cash flows of B (assuming a gross return of 10%)
The cash flows of A (assuming a gross return of 10%)The cash flows of B (assuming a gross return of 10%)


We can see that the charges for the initial years are high in B's case but as we pass through the 6th year, charges of A surpass that of B's. Also note that the Fund value of B surpasses the fund value of A from the 15th year onwards. At the end of 20 years, B's fund value stand at 28, 17,877 while that of A's is 26, 42,262.

Thus, it would be incorrect to judge the efficacy of an investment option just by considering the initial charges.


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Comments

Author: Partha K.03 Aug 2016 Member Level: Gold   Points : 0

I have chanced upon this old article. No doubt, this is an extremely useful article for the investors. Even today, many of the investors are totally confused about the mutual funds and ULIPs. Mutual fund is an investment vehicle where the fund manager pull money from the investors and invest the money according to the mandate (in equity, debt, gold or in all in a predetermined ratio). On the other hand, ULIP is basically a life insurance policy where a lesser part (usually less than 30%) of the premia paid by the policy-holder is used for investment purpose as per the wish of the policy-holder. So, mutual fund and ULIP, under any circumstances are entirely different.

I recommend this article for all investors who want to invest in a prudent manner. This type of article would help people not to fall in the trap of agents. At the same time, the investors must understand not to treat insurance products as vehicles of investment.

Author: Swagatika Pattanaik13 Aug 2016 Member Level: Gold   Points : 4

First of all mutual fund and ULIP both are different things.
Mutual fund is purely an investment option, where as ULIP is a life insurance product in addition with Life insurance, they provide some increase on your investment amount ( as some part of your money goes to stock market for investment).
Mutual fund - Suppose you invest 1 lakh, they deduct around 1% only as FMC and rest goes to investment in stock market and bonds, suppose you died then your nominee will get only near about 1 lakh ( might be some increase or decrease of amount).
Whereas suppose you invest Rs 1 lakh in ULIP, then some part will be deducted for your mortality charge ( which goes for life insured), some part for fund management charge and rest goes to market. So might be your 70% goes to market but if you died same year your nominee will get the sum assured of 10 lakh.
From the above message you can understand ULIP include your life risk, whereas mutual fund only help you to grow your money.
But I suggest instead of investing in ULIP, I would like to suggest invest your money in term insurance and mutual funds, where you get bigger life sum assured as well as higher return after 20 years.

Author: Partha K.13 Feb 2017 Member Level: Gold   Points : 3

I find this is an extremely useful article for the investors. Majority of the Indian investors are still totally confused about the mutual funds and ULIPs. Mutual fund is an investment vehicle where the fund manager pulls money from the investors and invest the money according to the mandate of that particular mutual fund (in equity, debt, gold or in all of the same in a pre-determined ratio). On the other hand, ULIP is basically a life insurance policy where a small part (usually less than 25%) of the premium paid by the policy-holder is used for investment purpose as per the ratio indicated by the policy-holder. So, mutual fund and ULIP, under any circumstances, are entirely different instruments.

I recommend this article for all investors who want to invest in a prudent manner. This type of article would help investors not to fall in the trap of insurance agents who sell ULIPs as an attractive investment vehicle. At the same time, the investors must understand not to treat insurance products as vehicles of investment. They must note that insurance is a safety umbrella which would be useful to the dependents of the policy-holder in case of any mishap.



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