The early stage of earning life has some of the most difficult investment decisions to make. Juggling between current needs, household purchases and long term goals can be quite confusing, and the struggle can be tiresome. Many do decide to overlook the long-term goals and focus only on current needs.
However, how difficult it can be to achieve long term financial goals if you do not start early enough can be understood with a simple maths in the following example:
Save Rs. 100,000 each year from the age of 30 till you hit 60 and you will have approximately Rs. 1.23 cr. even if your investment earns a humble 8% p.a. compounded return.
Don’t save anything till the age of 45 and then start saving Rs. 200,000 each year up till 60 and you’ll simply manage just about Rs. 59 Lakhs even when your investment also earned the same 8% p.a. compounded return.
Where To Invest?
For aggressive investors in their twenties and thirties, two investment options sound more interesting than anything else:
– Mutual Funds
– Unit Linked Insurance Plans
Both investment options offer similar exposure to your money whether you wish to invest in equity stocks or fixed income securities or a mix of both. However, when you are in for a long haul, small factors can make a big difference in the outcome and certainly, you’d like to be on the brighter side.
There are Multiple Categories where Both ULIPs and Mutual Funds can be Compared, here is a list of comparisons we made between ULIPs and Mutual Funds:
1. Ease of Investment
2. Choice of Funds/Investment Options
3. Cost of Switching Between Funds
4. Tax Benefits
5. Expenses Involved
Ease of Investment
Ease of investment can be associated with the effort it takes to invest an additional amount of money in the ULIP or a Mutual Fund. We find that both support the following options of investment:
– A Fixed Regular Investment (SIP – Systematic Investment Plan)
Both Mutual Funds and ULIPs allow for one time lump sum investment and a fixed, regular investment which can be made in any of the following modes:
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‘Systematic Monthly Investment Plan’ being the most suitable for investors, especially those investing in equity markets, can be recommended for investment in both ULIP and Mutual Fund.
Choice of Funds / Investment Options
There are three basic choices of funds for an investor:
A. Equity Stocks
B. Fixed Income Securities / Govt. Securities
C. Liquid or Money Market Investments
Your choice will depend on:
– Your risk appetite, and
– The time you can stay invested.
Both mutual funds and ULIPs have all three options available at any time for investment. However, there is a difference when it comes to how you can invest.
|Invest in different Funds if you wish to invest in all three options in a specific proportion.||Choose your funds within one single ULIP investment.|
|Manage multiple fund folios.||Manage only one ULIP.|
|Automatic Portfolios are not available. You can invest in Balanced funds (mix of Equity & Fixed income securities), but the ratio can change as per the asset management company’s decisions.||Select any of the type of portfolios you find suitable. E.g. higher equity in the beginning and higher debt (fixed income) at the maturity.|
Thus, this is one category where ULIPs score over Mutual Funds when it comes to hassle free investing.
Cost of Switching Between Funds / Investment Options
Switching between funds in case of mutual fund investments is a process which is considered as exit and new investment.
For example, you have invested in a debt fund and continue for three years, then decide to switch to equity fund. Although you can simply submit a switch request, it’ll be treated as a liquidation of the debt fund, and charges like exit load, the capital gain tax will apply to the money withdrawn (even if partial).
For ULIPs this is not applicable, as far as, you are not withdrawing away from the ULIP and investing somewhere else. Meaning, you can switch between funds within the ULIP as many times and your switches does not attract any extra charges or tax, unlike mutual fund switches.
ULIPs score pretty high over mutual funds when it comes to tax benefits:
|Invested amount can be claimed as a deduction only for ELSS (Equity Linked Savings Scheme) investments which are pure equity funds.||Invested amount is tax deductible regardless of the fund choice. i.e. you can invest in debt or Gilt fund and still claim deduction u/s 80C.|
|Partial Withdrawals are taxable depending on the length of investment and fund type:
⇒ Withdrawal from equity fund within 12 months of investment is taxable
⇒Withdrawal from liquid or fixed income funds is taxable for any period
|Partial withdrawals are allowed after five years of investment and are entirely tax exempt u/s 10(10D).|
|Maturity Value is taxable in case of Debt & Liquid fund investments for any period of investment.||Maturity value is tax exempt.|
ULIPs, no doubt, have more numerous costs than Mutual Funds (as shown in the tables below). However, the picture at the end of a long-term investment shows something different.
Mutual Fund Cost:
|On First 100 cr.||2.50%|
|On Next 300 cr.||2.25%|
|On Next 300 cr.||2.00%|
|Net Recurring Charge on Your Investment||2.05%|
Whereas, a ULIP investment will cost you:
|Fund Management Charge||1.35%||Premium Allocation Charge (Max Rs. 6000)|
|Policy Administration Charge||2.52%||Policy Yr.||Charge|
|Mortality Charge (Life Cover Premium)*||1||6%|
|Age (yrs.)||Charge P.A. (Rs.)||2||5%|
|60||13,980||6 yr. onward||Nil|
* For a Life Insurance Cover of Rs. 10 Lakh
Overall Cost ULIP vs. Mutual Fund
Assuming, you invest Rs. 100,000 p.a. in a ULIP (in Equity Fund) with a Sum Assured of Rs. 10,00,000 (life cover amount), and your friend starts with a combination of ELSS + Term Life Cover of Rs. 10,00,000.
If equity market generated a compounded return of 15% p.a., after 25 years of investment both of you will have a scenario like this:
|(ULIP)||(ELSS + Term Insurance)|
|Maturity Value||Rs. 1.75 Crore||Rs. 1.62 Crore|
|Reduction in Yield||2.04%||2.50%|
Therefore, overall expenses charged on your total investment comes out to be just about 2% in ULIP and about 2.5% in Mutual Funds. One more positive score for ULIPs.
Additional Benefits offered by ULIPs over Mutual Funds
ULIPs have numerous benefits over the mutual fund investments. Some notable ones are as follows:
ULIPs are one of those unique instruments where you can enjoy both tax benefits (tax saving and tax exempt maturity) and market linked returns from fixed income securities.
How to Buy?
Buying Unit Linked Plans is a simple process. All you need to do is, contact the insurer directly who will send a representative to guide you through the application process. You can clarify your doubts and understand the overall benefits of different available plans before deciding to invest in one.