The new marketing line amid insurance agents is “unit-linked insurance plans (Ulips) are cheaper than MFs”. This argument is based on the expense ratio that mutual funds charge vis-a-vis Ulips. But ask a financial advisor and he will strongly advocate a mutual fund for investment purposes and a term plan for insurance.
Even in terms of overall costs, an MF score. In September 2010, the Insurance Regulatory and Development Authority (Irda) had issued guidelines for Ulips, aimed at capping the charges on the product, which in the first year could be as high as 100 per cent of the premium. The guidelines were a huge help for customers.
In August 2012, the Securities and Exchange Board of India (Sebi) introduced measures for the insurance sector. Sebi allowed funds with assets worth less than Rs 100 crore to charge 3.12 per cent in expense ratio annually. This led many to believe that mutual funds have become expensive, compared with Ulips.
| MUTUAL FUNDS 0.5% has been added to historical ratios as expense ratios are likely to go up due to new regulations | |||
| HDFC Top 200 | BSL Frontline | DSP Equity | |
| Year 1 | 2.87 | 3.00 | 2.85 |
| Year 2 | 2.69 | 3.00 | 2.88 |
| Year 3 | 2.70 | 3.00 | 2.79 |
| Year 4 | 3.00 | 3.00 | 2.61 |
| Year 5 | 2.40 | 2.85 | 2.59 |
Such a notion, however, might be misplaced. For one, Ulips levy more than one cost in the first five years of investment but MFs don’t. For another, Ulips charge under various heads such as premium allocation charge (PAC), fund management charge (FMC), policy administration charge, mortality charge, et al, while the MF only levies an expense ratio (the fee charged by a fund house to manage and operate the fund). Therefore, despite a higher expense ratio, MFs work out cheaper than Ulips.(BREAK-UPS OF PLANS)
Sumeet Vaid, founder and CEO of Freedom Financial Planner, says Ulips are expensive products and, hence, should not be used as an investment vehicle. While insurance plans are best for risk coverage, Vaid advises one to stick to MFs for investment needs.
Sample this. HDFC SL Progrowth Flexi charges 7.50 per cent as PAC and 1.35 per cent as FMC in the first policy year. However, the plan does not levy any policy administration fee and mortality depends on the age to be insured. The cost of investment in the first year is 8.85 per cent (excluding mortality). For instance, if you are paying a premium of Rs 5 lakh for a Rs 50 lakh cover, your cost of investment in the first year would be Rs 44,250. The product levies a similar charge in the second year. However, in the third, fourth and fifth years, the charges decrease by two per cent. From the sixth year, the policies do not charge PAC but a policy administration fee is charged at Rs 6,000 per annum or 1.2 per cent, whichever is lower. FMC continues to be levied at 1.35 per cent every year.
Similarly, Aegon Religare iMaximize Plan does not levy a PAC but it charges a policy admin fee of Rs 1,200 a year and FMC of 1.35 per cent annually in the first five policy years. Taking the above example, the cost of investment would be Rs 7,950 yearly (FMC of Rs 6,750 + Rs 1,200). This is besides mortality fee, which increases with age. Five years of investment is considered because the lock-in period for Ulips is five years.
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Bajaj iGain III is an even more expensive product. It levies a PAC of two per cent, FMC of 1.35 per cent, and varied policy admin fees. In the first year, the investment cost would be Rs 17,134. In the second year, the cost is Rs 17,153, in the third year Rs 17,173, and so on. This excludes mortality fee.
We assume the investor will stay invested throug the policy term. However, if the investor wants to discontinue the policy, there are charges for that as well. All the three policies mentioned above charge six per cent of the annual premium or fund value not exceeding Rs 6,000 in the first four policy years.
In comparison, HDFC Top 200 (an equity diversified mutual fund scheme) levies only 2.87 per cent of the investment as expense ratio. For an investment of Rs 5 lakh, the scheme would deduct Rs 14,350. Birla SunLife Equity (an equity diversified mutual fund scheme) charges 3 per cent annually, or Rs 15,000, and DSP Equity charges between 2.59 per cent and 2.85 per cent in the first five years of investment. That is, between Rs 12,950 and Rs 14,250. Here, 0.5 per cent has been added to the historical expense ratios, because the expense ratios are likely to go up on the back of the new regulations.
While mutual funds can give 10-12 per cent annually, financial planners say Ulips mostly give seven-eight per cent annually if you have invested only in equity schemes.
Take your pick.
“Despite a higher expense ratio, after cost deduction, mutual funds invest a larger portion of the invested amount compared with Ulips, because Ulips have more than one cost levied on the investor. Secondly, most of the costs are in percentage term, thus eating into the invested corpus,” says a financial planner.