ULIP or ELSS Mutual Funds - Where to Invest

Unit-linked insurance policies (ULIPs) popularity, for some life insurance companies has surged to such an extent that they have become the talk of the town.

But have individuals also evaluated the option of investing in tax-saving funds/equity linked saving schemes (ELSS), which offer similar tax benefits?.

ULIPs basically work like a mutual fund with a life cover thrown in. They invest the premium in market-linked instruments like stocks, corporate bonds and government securities. Investments in ULIPs attract tax benefits under Section 80C.

Equity Linked Saving Schemes ELSS (Tax benefit under section 80C):

A tax-saving fund is a diversified equity fund. It works like an open-ended diversified equity fund that invests predominantly in the stock market to generate growth by way of capital appreciation for investors.

The only difference between an equity fund and a tax-saving fund is that the latter has a 3-year lock-in.

Misleading illustration by ULIP:

That is because the returns calculated by life insurance companies are often on that portion of premium, which is net of expenses. In other words, the per cent return shown in the illustration may not been calculated on the premium but on a figure, which is less than that, after deducting expenses from the premium.

Also, for some life insurance companies, the fund management charges are not factored into the returns shown in their illustration, which means that the net return will take a further beating to the extent of the fund management charges.

Higher Expenses One reason why ULIP returns are on the lower side compared to tax-saving funds For example, mortality charges as well as the high commission paid to agents(up to 25 per cent to 30 per cent commissionin first uear compare to 1.5 to 2 percent in case of tax-saving fund) are factored into the ULIP expenses.

While mortality charges are unique to ULIPs as compared to tax-saving funds, commissions form a part of tax-saving funds as well.

Exit load: ULIP may charge exit load for early withdrawal.

Maturity Time: If at the time of maturity, equity markets are down and your ULIP returns have taken a hit, you do not have the option of staying invested. You have to necessarily collect the maturity proceeds. But tax-saving funds offer is the option of staying invested in the scheme during maturity till the markets turn in their favour.

Consentration on Equity: Tax-saving funds (ELSS) are invested almost 100 per cent of their corpus in equities. Therefore, individuals who do not have the risk appetite for equities could opt for a balanced ULIP, as tax-saving funds would be too risky for them.

Switching: ULIP offers an individual the choice to 'protect' his portfolio if need be by way of shifting his money from high-risk equities to debt or go for a balanced portfolio, unlike investments in tax saving funds.

Capital Guarantee: Many insurance companies have introduced ULIPs with a capital guarantee. In case of a market slide, the insurance company purports to at least return the premia paid by the individual.

ULIP offers life insurance: A individuals might argue that a tax-saving fund does not offer life insurance, let us take an example of an individual buying a term plan plus investing in a tax-saving fund.

ULIP from ABC Company Ltd.

Age (Yrs)	Term of policy (Yrs)	Premium paying term (Yrs)	Sum Assured (Rs)	Premium (Rs)	Maturity amount (Rs)
30	10	10	1000000	100000	1520375

Assumed returns 10% CAGR
The figures used in the illustration above are based on that of an existing life insurance company.
The returns could vary across life insurance companies.

Term plan from XYZ Company Ltd.

Age (Yrs)	Sum Assured (Rs)	Premium (Rs)	Tenure (Yrs)	Death benefit (Rs)
30	1500000	3600	10	1500000

The figures used in the illustration above are based on that of an existing life insurance company.
The returns could vary across life insurance companies.

As the table indicates, an individual, instead of investing the entire amount of Rs 100,000 in a ULIP, opts for a term plan from XYZ Company Ltd for a sum assured of Rs 1,500,000. The premium amounts to Rs 3,600 per annum.

Systematic investment plan

Amount invested per month (Rs)*	Amount invested per annum (Rs)*	Investment tenure (Yrs)	Assumed return (%)**	Maturity value (Rs)
8033	96400	10	8	1456247
8033	96400	10	9	1534993
80300	96400	10	10	1618308

* Figures rounded off
** Compounded Annualised Return

In the table, we have assumed that the individual makes an investment of Rs 96,400 per annum (Rs 100,000 - Rs 3,600) in tax-saving funds. This amount is further divided into 12 parts for 12 months as we have also assumed that the individual will make regular monthly investments every year.

Assuming a 10 per cent rate of return, he will get approximately Rs 16,18,308 at the end of the tenure. But since mutual fund NAVs are usually net of expenses, we have also assumed returns at the rate of 9 per cent and 8 per cent.

The best part about keeping one's investment needs and insurance needs apart is that both work towards their respective goals separately. Therefore, in case of an eventuality, the individual's nominees would stand to get not only the sum assured from the term plan (i.e. Rs 15,00,000) but also the amount that has been invested in a tax-saving fund.

Of course, since the tax-saving fund has a lock-in period of 3 years, the maturity amount would differ to that extent. In our example, we have calculated the maturity value after 10 years.

The nominees would stand to gain only that part of the maturity amount, which has been unlocked, i.e. become free from the said lock-in period and can be redeemed.

So dear friend where does all this talk lead to?

Individuals with risk taking apetite : They can consider the option of buying a term plan separately and investing in tax-saving funds, separating their investment and insurance needs..

Others: Whilst investors who do not have an appetite for risks, but who would still like to add a dash of equity to their portfolio, could look at investing in a balanced ULIP.

Happy investing!