I am often asked this question, isn’t investing in ULIPs smarter there are lower taxes and there is also life insurance cover? The short answer is that a Unit Linked Insurance Plan is not a great option when it comes to building wealth.
Here are 3 Reasons, read on for more to see the “proof”:
The confusion largely comes from mixing ‘life insurance’ with a ULIP and calling it a better ‘investment’. You are better off buying term life insurance and investing the rest in a good mutual fund.
You may hear things like: “But you don’t get anything back by buying term life insurance” – the cost of term life insurance is only a few hundred/thousand rupees per year. Whereas the costs embedded in a ULIP are far higher!
Let’s take an example. As per the regulator, a ULIP can show only 8% yield in an illustration. We will use that for now. Assumed investment: Rs 2 lakhs per year for 5 years.
After taking into account various charges, the investor ends up with about 14.7 lakhs after 10 years. That may seem a big amount but the net yield is only about 5%. He was promised 8% but after charges, he gets only 5% or less.
The various charges investor incurs are:
As a result, the net yield drops.
This gets worse if you wish to withdraw your money as soon as the lock-in period of 5 years ends. You get a measly 1% net (see pic below on 5-year XIRR).
If you consider the same investment in a Mutual Fund you get a net yield of 7.37% instead of 4.92%.
The above illustrations are based on a 8% yield.
If you consider higher return scenarios, then the following picture emerges. I have considered some of the multicap funds using their actual 5 year returns as of July first week 2018. As you can see for the same investment, you get much more with Mutual Funds.
Of course, these are Direct Plans only (best selection available on Jama.co.in) – do not make the mistake of not buying direct plans. Your broker/advisor/distributor may not want you to go for direct plans as they do not get a commission.
Nowadays Mutual Funds are also offering insurance cover along with the monthly SIP. Taking that into account (we do not reduce the first year investment to purchase term life insurance) your net corpus could be higher by about 2% to 3% more.
As they say in Hindi, “Doodh ka doodh, Paani ka Paani”. Now you decide.
Note: You are advised to consult your financial advisor or insurance agent before making any final decision on going the ULIP route or invest in Mutual Funds.
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