Skip to main content

Mutual Funds vs ULIPs

 

What's on the table?

IRDA has proposed the following charge structure to be implemented by October 1, 2009.

 

Overall ULIP charge structure:

1. For policies with tenure less than or equal to 10 years: Overall charges are capped at 3 per cent of gross yield; fund management charges (FMC) have been restricted at 1.5 per cent

2. For policies with tenure over 10 years: IRDA has capped total charges at 2.25 per cent of which the FMC will not exceed 1.25 per cent

 

Other charge structures:

- The above cap will exclude mortality and morbidity charges

- No surrender charges are applicable post 5 years of policy

- From October onwards, insurers will also have to give on maturity a certificate to policy holders showing year-wise premiums paid, charges deducted, fund values, partial withdrawals (if any) and the final payment made

 

All existing products that do not meet the requirements of this circular should be withdrawn or modified by December 31, 2009.

 

Your benefits

The regulation will be good for investors:

1. It will increase returns

As per the new ruling, a fund earning a gross yield (returns generated without inclusion of charges) of 12 per cent has to give a net yield (returns generated post inclusion of charges) of 9.75 per cent back to investors.

 

For example: If you take a policy with premium of Rs 100,000 per annum for a term of 10 years, given the cap on overall expenses (year-on-year) at 3 per cent; the fund value at the end of the term would be Rs 14.78 lakh.

Currently, the overall expense (YoY) stands at around 3.75 to 4 per cent; in that case the maturity value stands at around Rs 13.97 lakh. That is, you'd get Rs 81,000 at maturity.

 

2. The mandated disclosures will enable you to make an informed decision

 

Level playing field, yet? Stand point on ULIPs and MFs: They are different investment avenues meant for different types of investing.

 

Mutual funds work better when your objective is short term in nature and you can afford a risk profile ranging between 'Moderate-High'. On the contrary, ULIPs should be considered only when you have a medium or long term objective. Also, it falls under the 'Moderate' risk category, essentially when you are planning retirement; children education, etc.

 

ULIPs or Mutual Funds - How to choose?

 

Consider these factors while comparing the two avenues.

1. Most MF distributors are now charging a fee – typically on AUM (assets), this is as good as increasing the Fund management charges. This could, in some cases, turn out to be a higher percentage than the entry load that was being paid on the invested amount!

 

For example: If you are making regular investment of Rs 50,000 per annum each in an MF and in a ULIP, over a 10 year and 15 year period, the corpus that would be generated in both cases would be:

 

 

Avenues  10 years   15 years 

ULIP        739,180    1,434,668 

MF           732,935    1,327,109

 

Assumptions:

Expense ratio for ULIPs: 2.25 per cent (10-year term); 3 per cent (15-year term)

Expense ratio for mutual funds currently ranges between 1.84 per cent to 2.5 per cent; we are assuming an expense ratio of 2.15 per cent - percentage charged on AUM is assumed at 1 per cent (thereby the total of charges being 3.15 per cent)

Growth in both cases is assumed at 10 per cent

 

In the above case, ULIPs would work better, however, for a retailer who does the mutual fund investment directly without going through a distributor / financial advisor, the AUM charges would not be applicable and that would increase the corpus derived from mutual funds.

 

2. If one were to bring both mutual funds and ULIPs on the same platform, then the element of insurance needs to be added, which would further increase the cost on mutual funds (in case of ULIP the mortality cost is charged till the fund value does not exceed the sum assured, post which it becomes nil, a term cover would charge a flat premium throughout the term).

 

3. The proposed EET (Exempt-Exempt-Taxable) regime could be a dampner, especially in case of mutual funds. The ULIP policies availed prior to the implication of the EET regime would still enjoy tax-free returns. While, in the case of mutual funds, the sale date will be considered and irrespective of when the investment was made, if the sale happens post EET regime then the returns would be taxable.

 

Conclusion:

It is becoming obvious that MFs and ULIPs are moving towards immense rationalisation; with the focus from now on being on the quality of investment advice.

 

The IRDA focusing on reduction of long term costs is a step in the right direction keeping in mind that the ULIP should be considered mainly for the long term.

 

This is just the beginning of a new era of transparency in investment solutions which will enable investors reap better value on their investments.

 

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

FCCB buyback

WITH dismal share valuations causing bondholders to redeem, and not convert their foreign currency convertible bonds ( FCCBs ), which until early this year were regarded as one of the most preferred options for raising corporate debt, suddenly seem to have become millstones around the necks of issuers. It is the redemption pressure on cash-starved issuers, coupled with the need to preserve liquidity by mitigating further forex outflow, which seems to have prompted the Reserve Bank of India ( RBI ) to issue the circular permitting buyback of FCCBs. As per the circular, issuers can now buyback FCCBs under the automatic route up to any limit out of existing foreign resources or by raising fresh external commercial borrowings (ECBs,) if effected at a minimum discount of 15% on the book value. Further, FCCBs up to $50 million can be bought back with prior RBI approval out of rupee resources representing “internal accruals”, if effected at a minimum discount of 25% on the book value. I...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now