Are Mutual Fund and ULIP the same thing?

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%)