With the long-term capital gains tax on equity, the unit linked insurance plans (Ulips) versus mutual fund debate is back. We ask the experts if Ulips are now a better investment than mutual funds.
Shyam Sunder, MD, PeakAlpha Investment Services Pvt. Ltd
“A place for everything, and everything in its place.” Growing up, this was the advice I received when I left things lying around. As the debate Ulips versus mutual funds continues, especially after the LTCG tax on equities, I would paraphrase it: “the right instrument for each need, and only the right instrument.” The different needs here are risk management and wealth creation. Term plans are optimal for risk management, provided premiums are paid regularly.... Ulips provide insurance with flexibility—if one had to skip premiums for any reason, the built-up fund value would bridge the gap. One can use options like limited premium payment, future premium waiver, partial withdrawal, and even policy revival—subject to underwriting—to ensure risk cover is maintained. Ulips also do a good job in addressing specialized needs like children’s education. The important thing is, everything comes at a price. Mutual funds do a better job on wealth creation, even with the new tax. And there are three main reasons for that. One, the long list of charges in a Ulip are replaced by one relatively low charge in mutual funds. Two, in case of fund underperformance, you are stuck in a Ulip, but can move to a better-performing mutual fund, or even a better fund house. Three, mutual funds grow on a tax-deferred basis until you redeem. If you need insurance with flexibility, consider Ulips. If not, stick with mutual funds.
Srinivasan Parthasarathy, sr EVP, chief actuary and appointed actuary, HDFC Standard Life Insurance Co. Ltd.
The choice of investment products depends on one’s investment horizon. Individuals who want to build a corpus through regular contribution over the long term need a product that is designed with a long-term objective. Equities as an asset class provide superior returns over the long-term. Ulips and mutual funds work well for those who are looking for an exposure to equities.
It has been widely believed that Ulips are better than other financial services products over a long-term horizon. However, the recent changes to LTCG tax have made Ulips a compelling proposition for relatively shorter-term horizons as well. There are other reasons why Ulips are better. First, they offer dual benefits of long-term investment and protection cover. The protection cover serves as a safety net for the family. Second, unit-linked products offer the flexibility to provide individuals the opportunity to switch between different funds—equity, debt or balanced funds—depending on one’s view of the markets, without invoking a tax liability. Finally, Ulips inculcate the discipline to save regularly for the long term.
The only shortcoming of Ulips is the inability to liquidate funds in the first 5 years. But, as most people invest with a time horizon of longer than 5 years, Ulips are an attractive investment vehicle to meet long-term investment goals.
Gajendra Kothari, MD and CEO, Ética Wealth Management Pvt. Ltd.
I still think mutual funds score over Ulips even after the LTCG tax. First, most equity mutual funds cost less than Ulips and, other things being equal, cost can be a big factor in delivering superior returns over the long term. Second, the performance of most funds has been superior to their Ulip counterparts. We have analysed mutual funds and Ulips from the same financial conglomerates and found that their own mutual funds have beaten their Ulip funds hands down. Third, you are stuck in Ulips for 5 years but you can withdraw from funds any time. Though we all recommend equity investing with a time frame of 5 years or more, at least you have the ability to withdraw your money, should a need arise. Also, if you are not happy with the performance of your fund in Ulip, you can’t switch the fund manager before 5 years. Fourth, not all investors want insurance coverage and many may already have a term insurance cover, in which case you are paying an unnecessary premium that indirectly adds to your cost. Finally, in mutual funds, the LTCG tax will only be applicable only when you redeem money, which may happen many years later. Until then, you are deferring the tax payment, which itself is a huge compounding in itself. Moreover, tax consideration is just one of the variables in deciding the investment vehicle and hence investment decisions should not solely be based on just one component.
Aashish P. Somaiyaa, MD and CEO, Motilal Oswal Asset Management Co. Ltd.
Return from equity comes from growth orientation of the underlying asset, processes and philosophy of the institution and skill and execution of fund managers. Whether it is insurance or mutual funds, platforms have pros and cons. What is striking about the difference between Ulip and mutual fund debate is actually how similar they are in terms of risk profiles and potential outcomes and yet how the industries and their regulators present the same thing unbelievably differently. Securities and Exchange Board of India wants the mutual funds to have true labelling... avoid names with implied promises, declare NAVs and expenses on websites every day…. The list of compliances goes on. The standard risk disclaimer is ‘mutual fund investments are subject to market risks,’ which to some people sounds like, “Unless you are really lucky or anaesthetized for a long time, you will lose money.” On the other hand, Insurance Regulatory and Development Authority allows the very same equity market investment to be marketed with lower transparency...names like Accelerator, Enhanced Equity, Growth Plus, Life Equity and similar adjectives. The standard risk disclaimer is ‘Insurance is the subject matter of solicitation,’ which sounds like, “This has nothing to do with markets, don’t you worry.” The unfair tax differential has only stepped into an already discriminatory and controversial dispensation.
