ULIP vs Mutual Fund SIP, Which is Better Investment?

I am sure you must also have pondered that which is a better investment, ULIP or Mutual Fund SIP?

Unfortunately, not much reliable information is available on internet related to ULIP vs SIP.

In this article, what is presented is more from my personal experience I gathered while dealing with ULIP and mutual fund SIP.

Hence, I think this blog post will clear a lot of cloud for the needy.

One day I called the relationship manager of my bank. The purpose of the call was varied.

The main intention was to start a Systematic Invest Plan (SIP) for long term investment. I wanted my relationship manager to suggest me few good funds.

My idea was to start SIP in diversified fund or in a balanced fund.

I shared this with the relationship manager. When the relationship manager came to meet me, he suggested few best performing mutual funds.

But he also suggested few ULIP’s.

I noted that he was putting more effort to convince me to buy a ULIP.

I was not prepared to consider ULIP for long term investment. I didn’t knew much about the ULIP.

My relationship manager informed me few things about the ULIP. He told me that ULIP has dual benefits. It provides life insurance cover plus capital appreciation.

My goal was to invest money for capital appreciation.

So ULIP was providing both, insurance cover and capital appreciation. So this way, ULIP must be a fantastic product, right?

I was not sure. There was a doubt?

ULIP – the next big thing in investment?

Frankly speaking, the packaging of an insurance product as a capital appreciation vehicle was a combination which was not blending together.

Insurance products (like term plan and endowment plan) are known for their zero to low returns.

And the products which offered capital appreciation (like stocks, equity based mutual funds) are no where linked with insurance plans.

But here there was a product which was a insurance product and still promising high returns.

The thing that was making me uncomfortable (because I was not properly informed about ULIPs) was the word “Insurance”.

Insurance is an insurance, how it can earn me high returns?

To answer this confusion, my relationship manager was ready.

He explained me why a ULIP is referred as a “unit linked plan”. He said that, as ULIPS are allowed to invest their funds in stock market, hence they will be able to give good long term capital appreciation.

This explanation, at that moment of time looked very reliable.

It is true that, as stocks are linked with ULIPs, long term returns can be higher. This cannot be a hoax.

But I have burnt my fingers with INSURANCE. I didn’t wanted to make the same mistake again.

This is the reason why, in my personal life, I never mix Insurance with Investment.

This was my personal rule. But ULIP was going completely against my rule.

The question was, is my rule outdated? Is ULIP a product that will be the NEXT BIG THING of investment world?

I had no answers to this. Neither my investment manager was more convincing.

I was not ready to accept an insurance product as a long term investment vehicle.

I didn’t want to be rude on the relationship manager. But without knowing which is better between ULIP vs mutual fund SIP I cannot take the final call.

So I decided to do some fact finding…

The fact about ULIP vs Mutual Fund SIP that I learnt in later days, I thought, was worth sharing with my readers. Hence this article.

I am very thankful that I did my study of ULIP vs SIP.

So lets see one by one what I learned about ULIP….

#1. Liquidity of the invested fund in ULIP vs SIP

A typical equity based Mutual funds provide full liquidity. Every penny invested to buy equity mutual fund units can be redeemed any time the investor wants.

ULIP’s do not provide any liquidity for the first 5 years. What does it mean?

It means, the investor would neither be able to surrender not withdraw his money invested in ULIP.

It means, in ULIP the money is locked for full 5 years.

For a person like me, who wants to invest money for long term capital appreciation, would certainly like to keep his money invested for 5 years. But, I should have control over my money.

I will not allow any ULIP Manager to keep MY money locked for 5 years for his benefits. I will instead, invest my money in a equity based mutual funds (which is also investing in equity and promises to give same returns).

So, my dear ULIP fund manager, can you please explain why you want my funds to be locked for 5 years? I know you will tell me blah blah about equity risk and returns.

But my dear friend, this lock-in thing is more prevalent in insurance sector.

If I am not wrong, you are keeping my money locked not for sake of giving me higher returns, but to cover your insurance costs in the initial years, right?

I will go for equity linked mutual funds. Bye bye ULIP.

#2. Life Cover provided by ULIP

Mutual funds do not provide life cover, but Ulips provide life cover.

So here, even if I do not like, I must say that ULIP has a distinct advantage.

But for an investor like me, who wants to invest money for capital appreciation, why I should care for life insurance?

Probably I already have a sufficiently big term plan protecting my family.

By the way, how much life cover ULIP’s provide? Is it sufficient?

Unit Linked Insurance Plan ULIP - Life Cover

Lets take my example to understand if the insurance cover provided by ULIP is sufficient or not.

I was interested to invest Rs.5,500 per month (Annual: Rs.66,000) in equity fund as SIP. Idea was to earn long term capital appreciation.

Lets assume for a moment that I decided to buy an ULIP with annual premium of Rs.66,000.

What will be the maximum cover that I get from ULIP (my age is below 45 years)?

As per the snap shot of a typical ULIP provided above, the life cover that a ULIP will provide will be:

  • Minimum : 10 x annual premium = 10 x 66,000 = Rs.06,60,000
  • Maximum: 20 x annual premium = 20 x 66,000 = Rs.13,20,000

Lets assume that I happened to get the maximum sum assured as per rules.

But even then, the life cover is only Rs.13,20,000. Is it sufficient?

I will say it is not even one tenth of what is required.

So here, you were trying to sell a ULIP to a person who wanted capital appreciation.

You confused him by saying that, as ULIP also provides life insurance cover, hence it is good. It have dual benefits, right?

But what is the reality? The life cover is not even one tenth of what I/my family will need.

If I would have bought a term plan with annual premium cost of Rs.66,000, I would have got a life cover of close to Rs.3.7 Crore.

I know this is a wrong way to compare a ULIP with a term plan, but just for the visual understanding I am giving this exaggerated example.

I just want to make not a point that ULIP may not provide sufficient life cover.

Term Insurance Premium

#3. Charges/Cost – ULIP vs SIP

I thought I nailed it in point number #1 and #2 itself.

But point number #3 was even more alarming (against ULIP). I already feeling bad about ULIPs. 🙂

When it comes to ulip vs mutual fund SIP, perhaps this is where the MOST DISTINCT difference lies.

Generally speaking, in a typical equity based mutual fund, the cost for an investor are either:

  • (a) exit load-1% (applicable only if redeemed within 1 year) or,
  • (b) expense ratio-2.5% (for good, big funds this can even go below 2%).

That is all the cost that our investment will have to bear in equity based SIP’s.

But in ULIP, the cost to an investor was not only huge but also extremely complicated.

Again, this is a typical of an insurance plan.

When I was reading a sales brochure of a ULIP, it was very clear, but it was long and complicated.

I am not sure why, my relationship manager didn’t tell me about the plethora of charges/costs that was applicable with ULIP.

But thanks to him that he didn’t explain me these costs across the table. He actually spared himself from seeing a client banging his head on the table. 🙂

The list of charges that comes with ULIP are as follows:

  1. Premium Allocation Charge
  2. Fund Management Charge
  3. Policy Administration Charge
  4. Mortality Charge
  5. Partial Withdrawal Charge
  6. Discontinuation Charge

The premium allocation charge is the major.

It is maximum in the initial years and lower in the subsequent years. Premium allocation charge of a typical ULIP is as shown below:

ULIP - Premium Allocation Charges

Another charge that has potential to eat away your returns of ULIP is called mortality charge.

In a normal insurance plan, we pay a premium. In case of ULIP, the insurance premium is called as ‘mortality charge’.

The mortality charge will be maximum for an aged person, and it will be minimum for young person.

Hence, all aged people, beware, ULIP is not for you all. Why, because mortality charges are deducted from our invested money each month (the below calculated amount / 12 is adjusted each month).

This is done by de-allocating units from your purchased ULIP.

How mortality rate is calculated is shown below:

ULIP - Mortality Charge

So coming back to our main focus on COST. What is the cost of ULIP?

Remember: mutual funds are much cheaper. If one stays invested in mutual fund for a period of more than 12 months, the cost will be around 2.5% (expense ratio).

Means, out of all the invested amount, 97.5% will be utilized to buy mutual fund units.

But in case of ULIP, the overall cost is as high as 10% to 12%.

Means, out of all the invested amount, only 88%-90% will be utilized for investment.

I find it hard to believe that, a fund whose cost itself is so high, how it can ever compete with a traditional mutual fund?

These days in India, people find it hard to earn a consistent return of 12-15% per annum. In this scenario, what returns ulip will generate when their upfront cost itself is close to 10-12%?

Anyways, I have my own reservations for ULIP.

By the way, here are my calculations explaining how ULIPs cost is close to 10%-12%. Please have a look and decide for yourself.

Case-1: Sum Assured is 10 Times the Annual Premium

ULIP - Overall Cost

Case-2: Sum Assured is 20 Times the Annual Premium

ULIP - Overall Cost

Now this is very interesting. But unfortunately again it is going against ULIP.

Why people wanted us to buy ULIP? Because it provided a dual advantage of investing plus insurance, right?

But above are two examples. In Case-1, the person got approval for sum assured equivalent to only 10 times the annual premium. In this case his cost of ULIP is hovering around 10%-12%.

In case-2, the the person got approval for sum assured equivalent to 20 times the annual premium. In this case his cost of ULIP will actually go up (14% to 16%).

What should I conclude with this outcome?

ULIP is actually penalizing a person if he got more life cover? Is this a good insurance product?

No, because it costing us more if we go for higher life cover.

Anyways, the life cover that we get from ULIP is not enough.

Is this a good investment product?

No, because if its cost is ranging from 10% to 16%, I have a serious doubt what returns it can promise even in long term.

After fifth year, where the Premium Allocation Charge become zero, even there the overall cost of ULIP is above 10% for a person who is 45+ years of age.

So, in terms of cost, ULIP is again a Big NO.

#4. ULIP Allows Income Tax Benefits

If one invests in ULIP, the proportion of principal paid towards insurance coverage can be used for income tax saving u/s 80C.

Even the overall income generated from ULIP is non-taxable u/s 10(10D).

If objective is insurance + tax saving + better returns then ULIP can be considered as one of the options. But there are better insurance products available in the market.

If objective is investment + tax saving + best returns then mutual fund SIP score better.

Traditionally mutual funds do not help investors in tax saving. But ELSS schemes allow income tax saving as well.

So, even in tax saving, mutual fund scores over ULIP.

This further proves my understanding related to ULIP.

ULIP is more a insurance option with some added benefits.

Final Words…ULIP vs mutual fund SIP, which is better?

To sum it up, I have prepared a small comparative which will highlight the main difference between traditional Life Insurance Plans, ULIP, and Mutual Fund.

SL Parameters Traditional Life Insurance Unit Linked Insurance Plan (Equity ULIP) Diversified Equity Mutual Fund (MF)
1 Purpose Insurance Cover Insurance cover + Investment Benefits Investment Benefits
2 Return on Investment Guaranteed Return as it invests in Low Risk Instruments (Fixed Return) Variable as it is linked to Equity Variable as it is linked to Equity
3 Regulatory Body IRDA IRDA SEBI
4 When to Consider Protection Against Mishaps + nominal returns in Long term Protection Against Mishaps + Better than nominal returns in Long Term High Returns in Long Term
5 How money (Premium) gets Utilized Premium = Low Expense + Towards Insurance Cover + Investing in Low Risk Instruments Premium = High Expense + Investing in Equity MF Money = Low Expense +Investing in equity
6 Expense High (No Upper Limit set by IRDA) – [Expense = mortality charges for the life insurance + premium allocation Charge] High = [Expense = mortality charges for the life insurance + premium allocation charge + fund management charge + admin charges] Low (Upper Limit is Set by SEBI) – [Entry load + annual fund management charge + exit load]. In many cases entry and exit load are waived
7 Tax Benefit Yes U/s 80C Yes U/s 80C No (Except for ELSS U/s 80C)
8 Investment Portfolio Remains Unknown (No Transparency) Remains Unknown (Less Transparent). Portfolio Tracking is Possible if Insurance Company Declares its holdings Declared on Quarterly Basis (more transparent). So Portfolio Tracking is Possible
9 Lock-in Period Yes till maturity Yes (5 years) No
10 Which is Better (in terms of safety of invested money) HIGH LOW LOW
11 Which is Better (as a LIFE Insurance Product) EXCELLENT BAD IT IS NOT A INSURANCE PRODUCT
12 Which is Better (as a Investment Plan) NOT SUITABLE BAD BEST
13 FACILITY OF SYSTEMATIC INVESTING (SIP) NOT POSSIBLE YES YES

ULIP is a good insurance product? No.

Perhaps insurance companies wanted to boost their sales further, and hence their decided to launch a product like ULIP.

What I mean to say is that, ULIP is a product which is probably not built to make money for its investor. Instead, it is a typical insurance product.

For an insurance product, the objective is never to make money for the policy holder. Their objective is always to bring-in as as many policy holders as possible, so that after payment of all the valid claims, their fund size remains HUGE.

Insurance is product which makes money only for the issuer.

Public must know that INSURANCE is not an investment vehicle.

So ULIP is a insurance product? It doesn’t do even this job better.

ULIP is a good investment product? No.

Please see the cost of ULIP for its investor. After payment of such costs, it is like impossible for any investor to earn above average returns.

Then why ULIPS are promoted as investment products? I think this is a sham.

If ones focus is investment, they must go for traditional investment products like mutual fund SIP etc.

Even today, ULIPS are largely miss-sold by agents. People buy it as an investment vehicle.

Agents sell it like this because they earn commissions.

I believe, when it comes to long term investment, equity linked mutual fund SIP’s are a better alternative than ULIP.


Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.

28 Comments on "ULIP vs Mutual Fund SIP, Which is Better Investment?"

  1. Great article sir. I have just buy two ULIP plans. So can I get it cancelled now.

  2. Hello sir,I have read your blog in details .But sir sorry to say thah you do not have proper knowledge about charges of ULIPs.
    second things i want to know from you how any MF funds expense ratio would be calculate?
    And 3rd and most important things is have you aware about market ULIPS product sir….There are no allocation charges levied on ULIP products…….So please sir give me your reply as early as possible ……M waiting

  3. Hi Mani Truly justified & Mind opening blog. Before reading this , i just cancelled / returned my ULIP for ICICI in the free look period after self analyzing the plan which shows 8-9% deduction annually- clearly , which was not told by my Manager. Truly case of misleading.

  4. Excellent insight sir. I got held up with ICICI prudential elite 2 with 2 lakhs annual premium. The investment manager at icicidirect first said that it is a mutual fund. Then he said like, it is also having some coverage in order to avail 80c tax benefit. He has literally cheated me now. It is just 4 months. I feel like breaking it now. Pls advise.

  5. incredible article sir. very very worth reading. thanks for helping me out which to choose. very big thanks sir.

  6. Hitanshu Khatri | August 22, 2017 at 1:56 pm | Reply

    Awesome article. I was confused whether to buy ULIP (HDFC pro Growth) suggested by my RM. But this page gave me an overall picture.
    Now, for investments/capital gain, I know mutual funds are the best.
    But, which one is best for getting an insurance cover- ULIP v/s Normal Insurance (LIC) v/s Term Insurance.
    I slightly feel reluctant to buy Term Insurance, because they will just take approx. 6-8k per year, and give me life cover, say 50 lakh. But my age being 30 years, I feel I should invest this money in something like LIC which atleast gives me some money after maturity?
    Comments please.

  7. This is an amazing article..clearly articulating…I have just purchased a ULIP – HDFC PRO GROWTH PLUS paying premium for 50k for 10 yrs (just completed 1 premiuim)..is it good one to hold on ULIP as such on the whole and if so this one in specific?..pls advise..
    AGE=30
    GOAL= TAX BENEFIT + INVESTMENT.

    Sudhakar
    +91 9176236797

  8. Nice article. In my view ULIP is the most misselling product in the financial market. ULIP can be a good product for long time horizon and for the persons who can not distinguish insurance and savings.

  9. Dear All,

    Never ever mix up investment and insurance together. i.e. Never go for ULIP like schemes. Go for term plan at young age for insurance.
    as Just an example … I invest Rs 30,000 yearly in XYZ ULIP. The growth rate may be shown as 20% up to max 30-35%. But But every month of the year the deductions will be there as Policy Administration Charge, Mortality Charge, Service Tax1, Service Tax2, Service Tax – Mortality Charge ….. All these will add upto Rs 400 per month. In an year you will lose around Rs.5000. So your growth are absorbed here.
    Do not opt any ULIP Plans ……………

  10. ULIP should be banned from market because of hefty charges levied, basically it is just a combination of Term Insurance Plan + Mutual Funds.You may check this mutual funds versus ulip post which gives proper explanation with an exaample

  11. Nice article. So, is it a good idea to invest in mutual funds for growing money and take term insurance separately for life cover?

  12. GUNAVANTA BHAKTE | March 2, 2016 at 8:08 pm | Reply

    I purchase HDFC clik to invest ulip plan through policy bazaar it better or switch it to another. What is another option. Pls suggest me.

  13. I prefer ULIP over mf for insurance cover. Actually d day new birth starts its on its journey of life to death, as no one know how long is it ULIP always scores.
    neerajsharma.delhi@shriramlife.in, 9810221827

  14. ULIP – Fund management charges will be deducted from allocated units.
    MF. – Fund management charges will be deducted from total fund . NAV will be declared after fund management charges. our units will not be deducted.

    so for a period of 20 years Ulip- my units will be deducted every year, where as in MF all my units will be in my account

  15. Those who argue that investing in the mutuals is best way of managing your hard earned money and ULIPs are primarily an insurance plan if you need insurance only then you buy.
    I get weird feeling when I get across such half baked truth today ulips(for instance Future gain)cost less than 2% p.a.( if customer chooses 20 yrs policy term and cost lesser if chosen term is below than this no mutual fund is there in the industry which charges less than 3.5% p.a(expense ratio plus fmc)so to say that Ulips are more costly than mutual funds is not always true(barring the cases where investor is buying it beyond the age of 50yrs.)

    • For long term its better to invest in equity linked MF instead of ULIP. The returns that a good equity linked fund can give in long term (>10 years) itself justifies its purchase. But if ones objective is avail benefit of both insurance & capital appreciation then ULIP’s will come into consideration.

  16. Hi,
    1. What are the charges for SIP and On line MF SIP?
    2. Which one is the suitable platform to invest in on line like my universe, funds india, scrip box or any other ?
    3. I purchased hdfc life click to invest ulip plan on 10 Oct 2015 from policy bahar. My purpose is investment. Kindly tell me whether it is a good plan or I can switch to direct sip. From above said companies.
    Regards
    VIKAS JASROTIA
    M- 9914121077 .

  17. Hi,
    1. What is the difference in charges between offline MF SIP and On line MF SIP?
    2. Which one is the suitable platform to invest in on line like my universe, funds india, scrip box or any other ?
    3. when can i get my refund back even after some charges from invested in ulips. at presently 3 months sip done. and for 30 years term, and minimum lock 5 years.
    Regards
    Nayan Patel
    M- 97370 11880.

  18. which is the best ulip plan in india?

  19. which is good one ulip or mutual funds?

  20. ULIPs provide switching partly or completely among funds with or without a fee, whereas with mutual funds there will be an exit load if you are redeeming units before a certain minimum tenure.

  21. Since recent govt increased 2 Lakhs for tax savings, so I looking good ULIP which has purely on investment side and also i can claim 80C tax saving, Pls suggest which ULIP will be good as investment and tax saving point of view and also pls suggest best mutual fund to invest.

    appreciate if you can provide above details to my gmail id : nshareen@gmail.com

    Thanks
    Kumar.

  22. JASPREET SINGH SARNA | September 14, 2014 at 7:26 am | Reply

    Thanks manish
    Pl. intimate some good MF for investment purposes (Not TAX SAVING)
    mail id is jaspreet_singh_sarna@yahoo.co.in
    Thanks

  23. I have taken a ulip without insurance (it is a retirement fund) ….am enjoying tax benefit and money flows in equity.ulip advantage is switching over between equity and debt.

  24. Hello Manish, this is a very fundamental knowledge that you have shared. Excellent stuff for new investors. I burned my hand with Tata Aig Invest Assure two. Mine was a clear case of mis-selling by agent for commission. Thanks a lot.

  25. Vinesh Kumar | March 3, 2014 at 4:49 am | Reply

    Hi,
    I had two things to add:
    1. I wanted to add about equity mutual funds is that there is not long term capital tax on them . Also, for debt mutual funds, long term capital tax is inflation indexed.
    2. ULIP’s cannot be trusted completely (as is the case with all insurance products). The claim settlement ratio of the company should be looked into.
    Having said that, I think you do a great job in creating awareness among small investors like me. Keep up the good work. Please let me know if I am not correct with the above observations.
    Thanks,
    Vinesh

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