ULIP vs Mutual Fund

Unit Links Insurance Plan (ULIP) and Mutual Fund (MF) are the two most preferred options for a part time investor to invest into equity. But how do we decide which one should we go for. Though it is very easy to decide, people tend to confuse themselves most of the time. This article talks about some points that you need to consider while deciding which option we want to take.

Mutual Fund are pure investments. ULIP are combination of Insurance and Investment.

First question that we need to answer while buying ULIP is - Do I need to buy insurance?

1) Does the person seeking insurance have any financial liabilities?
2) If something happens to the person, Is there someone who can be in a financial crisis?

If the answer to the above two question is yes, I NEED TO BUY INSURANCE.

Now let us compare ULIP and MF based on certain well known facts:

1) Insurance
ULIPs provide you with insurance cover.
MFs don't provide you with insurance cover.

A point in favor of ULIPs. But let me tell you that you don't get this insurance cover for free. Mortality charges (i.e. the price you pay for the insurance cover) get deducted from your investment.

2) Entry Load
ULIPs generally come with a huge entry load. For different schemes, this can vary between 5 to 40% of the first years premium.
MFs have a small entry load of a maximum of 2.5% which can also be waved off if you apply directly (i.e. not through a agent).

Here MFs have a huge advantage. If we consider a conservative market return of about 10-15% you may get a zero percent return in the first year.

3) Maturity
ULIPs generally come with a maturity of 5 to 20 years. That what ever money you put in, most of it will be locked-in till the maturity.
Tax saving MF ( Popularly called as Equity Linked Saving Scheme or ELSS) come with a lock-in period of 3 years. Other MFs don't have a lock-in period.

Again MFs have advantage over ULIPs. ULIPs do allow you to take money out prematurely but they also put penalties on you for doing that.

4) Compulsion of Investing
ULIPs would generally make you pay at least first three premiums.
MFs don't have any compulsion on future investments.

If you have invested in a MF this year, and in the next year you dont have enough income or money to do investments you can decide not to make any investmets. Also if you notice that the MF that you invested in is not giving good returns as compared to some other Funds scheme, you can decide to invest in some other MF.

5) Tax Saving
Both the ELSS and ULIP come under 80C and can save you tax. Returns in the both form of investments are tax free.

6) Market exposure
ULIPs give you both moderate and aggressive exposure to equity market
Debt and Liquid MF let invest with low risk, but don't give you tax benefit.

ULIPs need not be aggressive in equity exposure. That is ULIPs need not keep more that 60% of their funds in equity market. ULIPS also allow to change your equity market exposure. Thus it can help you time the market and still give you tax savings.
If a MF has a less than 60% exposure to equilty market the returns from it are not tax free. Thus you don't get to take a conservative stand on returns.

7) Flexibility of time of redemption
ULIP will get redeemed on maturing. Premature redemption is allowed with some penalty.
In MF Premature redemption is not allowed. For a open ended scheme one can redeem the MF anytime after maturiry

This is mainly useful if the market is down at the maturity time of the investment. In case of ELSS you can wait till the market comes up again and then redeem them. ULIP scheme won't allow you to wait.

Thus, According to my opinion

1) If you wish to take a agressive exposure to equity market, go ahead any buy MF. ULIP wont be able to give you similar returns.

2) If you think you are not diciplined enough to make regular investments and need a whip to make you invest, invest in ULIP.

3) If you want to take a low exposure to equity market and still get tax free returns, invest in ULIP but make sure that fund you are invested is conservative fund.

4) If you want Insurance cover and also good return on investment. I would suggest that you invest in MFs and take a term plan.

If you find any information wrong or missing feel free to comment on the post.

Demat Accounts Comparison

To start trading online we need a demat account and a online trading account. There are many companies offering these facilities. Although this list is not comprehensive we have tried to look at some of the big players in the field. We will also look at their charges. The charges shown may change with time, so I would suggest you to get the latest charges from the vendors themselves.

Things you should look for while going in for a demat account:

1. Annual Fee: Nearly all the demat account provider charge some fixed yearly fees.

2. Commission: Commission on buy as well as sell. Each transaction either buy or sell attract commission from your broker. This is generally some %age of the transaction value.

3. Any other charges
4. Online trading account: Check if the company provides an online trading facility. Most sites work well with Internet Explorer that is shipped with any version of Microsoft Windows. Most of them doesn't work with other browsers like Mozilla Firefox, Apple's Safari.
5. Research content: Almost all the big player give daily recommendations of buy or sell to its members.

Name: Kotak Securities
Site: http://www.kotaksecurities.com/

Probably one of the oldest player in the field. Their main strength lies in the research content that they provide to their users. Account opening charges are about Rs. 750 you also get a zero balance kotak mahindra bank account with it. Brokerage for a low volume trader at 0.59 % is quite high as compared to most of its peers. There is also a deliver charge of Rs 23 for every delivery based selling. Brokerage for intraday transaction is 0.06%. The trading interface is quite powerful but is geekish. You need to know a lot of terms of trading to effectively do online trading. Exact brokerage can be found at http://www.kotaksecurities.com/accountsection/kotakgateway_id4.html#id4

Name: ICICI Direct

Site: http://www.icicidirect.com/

Amongst the top trading sites, ICICIDirect probably is the only one that lets you trade in US market too. The annual maintainance charge is Rs 500. Brokerage at 0.75% is highest amongst its peers. There is demat charge of Rs 25 for every buy. Trading interface is quite intuitive it is easy to square-off a transaction intraday.

Name: Reliance Money

Site: http://www.reliancemoney.com/

At the level of 0.1% brokerage is probably lowest. The interface is also good. But this account comes with prepaid plans. They do charge Rs 12 for every request places through telephone. Annual maintenance charges are very less only Rs 50. I think they will impact this industry the same way they did the mobile service industry. They also allowing trading in forex and commodities. But it has some basic functionality, like portfolio viewing, missing.

Name: IDBI Paisa builder
site: http://www.idbipaisabuilder.in/

Account opening charges are Rs, 700. Can work with only three banks, IDBI, AXIS or HDFC. Commission is comparable to others.


Name: HDFC Securities
site: http://www.hdfcsec.com/

Account opening charges are Rs 2250. Commission is 0.75% for both buying and selling with a minimum of Rs 100. More information about the account opening process can be found at http://www.hdfcsec.com/Common/NRICustomerAccount.aspx#Charges


Name: Geojit
site: http://www.geojit.com/

Rs 500 is account opening charges. Brokerages are about 0.3% for delivery based trade and 0.03% for margin trading. But their main site did not seem to work properly in Firefox.


If you think that some facts are reported wrongly or some information is missing, please feel free to comment of the post. We will try to incorporate the changes so that this post becomes useful for other.