If I have a need of mobile phone and a camera,what options may I have? Possibly two options
1.Buy branded mobile phone with built in camera.
2.Buy mobile phone of better brand like Nokia and buy camera of Kodak or Nikon.
Though first option looks comfortable,,peoples might be preferred to have second options where they want to keep both needs separate and consider quality of their expenses.
Similarly,prospective investor have similar questions in their mind.Which one to choose Unit Linked Insurance Plans or Mutual funds for their investment.We can’t generalise the answer but look at the key differences between these products.
1.ULIPs are offered by insurance companies while mutual funds are offered by asset management companies.
2.Asset allocation charges are considerably higher in ULIPs.While mutual funds do not carry any entry loads.This hole of charges gets bigger if considered for longer term.E.g. Consider an investor investing Rs.1Lakh in ULIPs and asset allocation charges are suppose 10%.It means that Rs.10,000 will be deducted from your premium and rest i.e.Rs.90,000 will invested in equity market.After 20 years,charges of Rs.10,000 will result in loss of nearly 68,000 if considered for rate of return of 10% CAGR.Most of the ULIPs charge for at least first 3 years.Combined effect of allocation charges of 3 years causes a big hole in long term.
3.One of the advantage of ULIPs is that longer term (at least 5 years)commitment is required.. investors are keen about their investment due to fear of lapsation of policy.Also each year market conditions are different and helpful for investors.Mutual fund investment does not need any compulsion and some negligance is possible.
4.There is maximum expense ratio of 2.50% from mutual funds while ULIPs charges nearly same fund management charges mostly on monthly basis.Expense raio charged by mutual fund is inclusive in daily NAV declared while in ULIPs fund management charges are applied through cancellation of units.This diminishes the compounding effect in future.
5.Insurance covered in ULIPs is age dependent.Mortality charges increases with age while in term insurance premium is level premium and constant throughout the policy term and should be preferred as only it can satisfy the need of big insurance amount.
6.Tax benefits U/S. 80C will be available both in ULIPs as well in ELSS schemes of mutual funds.To avail tax benefits under ULIPs insurance cover should be at least 5 times that of premium paid.
