Imitation is the best form of flattery. Mutual funds have been so successful in India that copycat products are now springing up that try to look and sound just like mutual funds. Recently, insurers like PNB Metlife, Max Life, Bajaj Allianz, and LIC have launched NFOs or new fund offers of ULIPs that sound exactly like mutual funds. It is important that you don’t end up buying a ULIP when you intended to buy a mutual fund.

In this episode of Question of Money, I’m going to talk about how ULIPs differ from MFs and why MFs are more investor friendly.

Investment versus insurance

Mutual funds are meant for wealth creation and nothing else. The only benefit you can expect from a MF is that its NAV will track the prices of the stocks in its portfolio. When you redeem your units, you will earn returns based on the NAV gains.

Whereas ULIPs or Unit Linked Insurance Plans offer a combination of investment returns and insurance. So when you invest, one portion of your money will go into buying a life insurance cover and only the remaining amount gets invested in stocks or bonds. MFs are regulated by SEBI while ULIPs fall under IRDA.

Anytime exit

In open end mutual funds, you can cash out at any time of your choice at the prevailing NAV without added costs. You can remain invested as long as you wish.

ULIPs are products with a fixed term of say 10, 15 or more years. Your investments are locked in for the first five years. If you opt for surrender, you will not get the cash until 5 years are completed.

Fixed premium

In a mutual fund there’s no compulsion to invest a fixed sum every year. Even if you do SIPs you can pause them at any time. In ULIPs, you commit to paying a fixed premium every year and your policy can lapse if you skip it.

Multiple costs

In mutual funds, the only cost you incur is the Total Expense Ratio or the annual fee that is paid to the fund manager to manage the fund. SEBI caps the fees that MFs can charge you at 2.255 for equity funds and 2.5% for debt funds.

Whereas in a ULIP, you are subjected to multiple charges. The first is the mortality charge that goes towards the insurance cover. Then there are premium allocation charges, policy administration charges, fund management fees, surrender charges in case you want to cash out early. There can also be added charges like switching fee, rider fee and topup fee. The insurance regulator specifies that all the charges of a ULIP put together should not reduce your returns by more than 2.25% for policies of less than 10 years and 3% for policies of more than 10 years. But mortality charges, taxes are outside this cap.

NAV calculation

A mutual fund NAV accurately reflects the performance of your fund. So if your fund has seen a 25% jump in NAV in the last five years, those are the returns you will get by selling the fund. MF NAVs are disclosed net of costs.

But ULIP NAVs reflect the portfolio value before costs. Costs that ULIPs charge are adjusted against the number of units you own. So the NAV return on a ULIP is not the return you will get when you sell.

This is also why there are many databases such as Value Research that allow you to compare MF returns across categories and with their peers, based on NAVs. ULIPs do not lend themselves to such transparent comparisons because there is no standardisation of product names or NAV.

The above features tell you that MFs are more flexible, transparent and liquid than ULIPs. But how do you tell if the NFO you’re buying is that of a MF or ULIP? First off a ULIP will be launched by an insurance company with the word “life” in its name. The product description will usually mention the words ‘non-participating, market-linked’. The investment you make will be called a ‘premium’ and will carry GST.

If you see these signs, be aware that you’re buying a ULIP and not a mutual fund.

(Host: Aarati Krishnan, Producer & Edits: Anjana PV, Camera: Bijoy Ghosh & Siddharth Mathew Cherian)

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