My insurance broker approached me with a new unit-linked insurance plan (Ulip) last week. He said after the changes introduced in Ulips from September 1, these were a more attractive investment option as compared to mutual funds (MFs). I want to start investing in the equity market with a horizon of 20 years. Which instrument is better — Ulips or MFs? What are the advantages of investing in the two?
It seems you are considering insurance products from an investment perspective. This is not a very good strategy.
While expenses in Ulips have reduced drastically, even MFs have had a zero entry load rule since August last year. Also, there are several exchange-traded funds (ETFs) where the expense ratio, or the cost an investor incurs in investing in these, is minimal. Therefore, purely on a cost basis, MFs are cheaper.
There can be instances where a particular Ulip performs better than its peers, as they invest in MF schemes. However, it is difficult to predict which scheme will outperform over a 20-year period.
I would suggest you to opt for an index fund in the form of an ETF. It will ensure that your expenses are lower throughout, and you have the flexibility of manoeuvring liquidity in times of need.
I am 30 years old, married and have a child. I have no ongoing loans. My immediate goals are to buy a house (Rs 35 lakh) in two years and a car (Rs 4 lakh) next year. My investments are mostly in debt instruments as follows:
Life cover = Rs 25 lakh (annual premium of Rs 10,000)
Personal accident cover = Rs 15 lakh (annual premium of Rs 2,814)
Three Life Insurance Corporation policies; total annual premium = Rs 18,000 a year; sum assured = Rs 3 lakh (including a money back plan)
Two pension plans; annual premiums = Rs 60,000 & Rs 42,000; sum assured = premiums paid till date
One child plan for my child’s education, I plan to take one more; monthly premium = Rs 2,500
Public Provident Fund = Rs 3 lakh
Fixed deposit (for liquidity) = Rs 3 lakh
Recurring deposit = Rs 12,000 a month till July 2011
National Savings Certificate (varying maturity from October 2010 to December 2012) = Rs 75,000
Mutual funds and equity linked savings scheme = Rs 50,000
Exchange traded fund = Rs 33,000
Stocks = Rs 1.4 lakh
How do I plan for my goals?
From the details you’ve provided, it seems most of your investments will not be liquid at the time of your goals. There is a mismatch between your investments and goals. For buying a house, you will have to opt for a housing loan. Try and make the down payment for the maximum amount possible and opt for a loan of the shortest period. Also, if possible, delay purchasing a car unless it is extremely necessary.
The writer is a certified financial planner. Send your queries to yourmoney@bsmail.in
