ULIP vs ELSS

POSTED BY Aman ON December 6, 2010 8:07 pm COMMENTS (18)

I am a young investor and new to financial planning . I have taken a term plan of Rs 1 crore and started a 1000 Rs SIP of HDFC top 200. I have to do a tax saving of Rs 25000 for this year, side by side i want a corpus to be build for my new born sun.

I am confused wether i should go for a ELSS MF and another SIP , or shall i go for HDFC pro growth ULIP. Is it true that in long term (10 yr) with avg 10 % of returns ,ULIP charges are less than FMC(2.25%) of a MF ? or am I missing something ?

 

Thanks,

Aman

18 replies on this article “ULIP vs ELSS”

  1. Sirish says:

    Dear,

    For a Long term goal like Child Education, Retirement & Wealth Generation, ULIPs are better. You can go to MFs for short to medium term benefits. Though ULIPs charges are higher than that of MFs in the beginning, later after 5 years as the fund grows, ULIP Charges get cheaper when compared to MFs. There will be loyalty additions too in ULIPs at the end. You have an additional advantage of Insurance in ULIPs.

    There are many blogs online where you can compare both. Just type “ULIP Vs MF” and you can go thru them. Finally, don’t rely on any one’s decision as the plans differ from individual to individual. Spend some time on net and you can come to a conclusion of which plan suits you better.

    1. Thanks for your comment Sirish

  2. Ramesh Mangal says:

    @Shashank

    Please go ahead!

    Ramesh

  3. Ramesh Mangal says:

    @shashank

    All your points are valid!
    But I have not seen anybody or heard from anybody, to have a Ulip at these multipliers. I agree I have a narrow view (without full realisation of all the facts). Even today, the Ulip company or the majority of the sellers are not educating people about this concept.

    In my view, even if you are the only one who is saying correct things, then I will go with you. And I do not think you are a fool at all. Facts are not the domain of the democracy – if everybody is saying a thing, that does not make it correct necessarily. The one who points out that the emperor is naked maybe alone but he is correct. So please continue educating us.

    Thanks
    Ramesh

    1. shashank kashettiwar says:

      @ Ramesh,
      Thanks for your empathy!
      @Prabeesh,
      Your open mindedness about accepting an error is appreciable!

      If this topic has not become stale or boring I can add some inputs from my side regarding:

      a) the structural advantages offered by a ULIP product( the principle of level premium and increasing premium product design- i.e. level and increasing mortality charges)
      b) waiver of premium rider- its distinct advantages and NEED in the face of total non existance of any standalone product in India for covering disability. The difference between a ‘waiver of premium rider’ and a ‘payor rider'(yes, there is this rider which you may not have heard about- typically involved in child insurance or child focussed plans, eigther could be built in or offered as a separate and compulsory rider)

      And offcourse we can go on discussing the prudent strategies for maximising the returns or optimising the returns in equity investments through various available routes.

      shashank

      1. crn.prasanna@gmail.com says:

        Hi Shashank,
        Really your explanations are too good. Can you suggest some of Ulip Plans?

  4. shashank kashettiwar says:

    @Prabeesh,Ramesh

    Prabeesh,your point that if the ULIPs are so great according to me’ then why are they being bullied, battered and rejected by various writers in financial planning magazines, websites etc is valid. Are all these writers fools and Shashank is the wise one? Can so many people be wrong and a lone voice who is in distinct minority be sane? Let’s examine. If we find that Shashank is a fool, then we all can ridicule him. but if it so happens that what he is saying is the sensible thing then I don’t think there would be any harm in joining his voice and declaring that others are making a grave error of judgement and should be bold enough to admit so; fair enough?

    Let me share some facts, not views, which are not known to you at all.( I have some questions on your premise also that majority of mutual funds are underperforming the index by a huge margin even after long time elapsation and your proposed strategy of keep on churning the portfolio regularly to beat this scenario—but we shall come to this a little bit later)

    So two things which we need to know and talk about are;
    1) What are the features of a ULIP and how it is constructed and
    2) What kind of returns are fetched by investing in the equity as a class and what is the most sensible strategy to achieve this through investing in open ended/ELSS/ULIP type funds.

    Let me talk about the first point. First of all this is totally wrong that ULIPs were allowing only 10x or 15x type multipliers or today also they are not much better on this multiplier fund. What has created this impression on you is because a)you never came across sensible salesmen of these products or even sensible/knowledgible employees of insurance companies b) That is how(10x or 15x), comparision of ULIPs and MF+term combo were compared by popular magazines and websites.

    The ICICI Pru LIfe’s original Life Time product(closed inJune’06 along with other insurers products offering unlimited top up by IRDA) was offering a multiplier of 150x at age 30 and 100x at age 40. AND I HAVE PERSONALLY SOLD THESE TYPE OF MULTIPLIERS TO CLIENTS. Other companies were also offering these kind of multipliers. It was unfortunate that this fact was not told by the uneducated selling community nor was found out by these so called experts. The products which replaced these in June’06 were also offering 100x multipliers at age 30 then it moved down to almost 80x in the newer versions and today also you can opt for a 70x multiplier in the I-Prus current version in the post 1’st SEpt regime. Most important the people who have these products can even today increase the multipliers i.e. the risk cover by undergoing the medicals i.e. fulfilling the underwriting norms.(Wii continue. Meanwhile if you can read my comment on ‘subramoney’-Ulips are Good- that would be really nice. I will join the discussion in evening)

    shashank

    1. prabeesh says:

      @shashank

      just like ramesh ,i too haven’t heard of any policy more than 10x or 15x,,when i recently visited bajaj allianze local office they said its not possible to increase the SA more than 10 times of the premium..also for this the premium will be increased even for 10x increase.

      no i am not trying to prove anyone as fool,,i just need a good debate based on points i know and points i am learning from you,this will make everyone wealthier with respect to decisions we are going to make.

  5. Atul says:

    ELSS has lockin period of 3 years and in most cases the returns are good. ULIP charges are higher in initial stage, however in long run the returns are good if plan has more equity exposure.

  6. Ramesh Mangal says:

    @Shashank

    My issue with ‘most’ ULIPs starts from the premium multiplier. Previously (before 1st Sept 2010), most of the ULIPs were sold at a multiplier of 5x (the minimum) while now that will be 10x. Very less Ulips were at 10 or 15x, leave 40x aside.
    You have talked about the term plan. At present, the term plans for high amounts through an agent is about 330-400x. For internet based plans (without intervening agents), it approaches the level of 800x. (The actual values have been considered for a term plan of Rs 1 crore, for a 30 year male non-smoker for a period of 25 years, by HDFC Term,LIC Amulya Jeevan,ICICI iProtect).

    Two days ago, a long term (4 year) agent of HDFC Life came and quoted me a term plan of Rs 23000 per annum for 1 crore, with the caveat that he will give me 30% kickback out of the 40% commission that he gets.

    Regarding your waiver of premium option. You have mentioned that a ULIP will keep on building the corpus. And a term+MF combo would not.
    Lets see. Say I have Rs. 10 lakh today (I would love to have it) 😉
    Scene 1: I can get a ULIP (most likely, not guaranteed) for a cover of 1 crore for a period of 20 years. If I die within the first year, my nominee will get 1 crore and also, the corpus will go on building with the premium waiver option.
    Scene 2: I can get the same cover of 1 crore for 30k (LIC, the most expensive), while the rest (Rs. 9.7 lakhs) can be invested in a MF (large cap/equity hybrid). What do you say about the growth of the this corpus? In my opinion, this money will also go on and build you a big corpus at the end of term.

    The main point is that the commission structure of the insurance plans is such that it is very much against the customer. With the newer internet plans, it is getting more and more friendly for the customer.

    Your analysis of the long term performance of equity funds, whether MF or ULIP or ELSS, is entirely correct in my opinion.

    I have issues with the index fund concept, but that will be part of another write-up!

    Your comments are welcome.
    Ramesh

  7. Ramesh Mangal says:

    @Siva,
    Why do you need life insurance for housewifes and students? I fail to understand the utility of a term insurance for them (remember they do not have financial dependents upon them, they themselves are dependents!).

    Ramesh

    1. shashank kashettiwar says:

      Which are the top rated funds is known only as a hindsight. Selecting those need not result in better returns than the ULIP fund. Also this ULIP fund is going to be just one of the funds in the portfolio of funds with a person. Do all the funds in the portfolio when they are selected giving us same rate of return? No, there is a band of performance and I dare say this range of the band could be from 5 to 10 percent atleast if not more. And in long term is the portfolio return going to beat the index return in a big way? Is that happening in more matured markets also? No. Then why so much issue is made around this fact that you cannot change the ULIP fund if it underperforms? As if it is going to do so year on year. Year on year aren’t the insurance company or the fund managers concerned about it? They are not interested in rectifying the underperformance if any? If we see from the purely theoretical angle, then actually ELSS and ULIP funds should deliver better performance than open ended funds.(Less redemption pressure, possibility to take longer term calls, lesser cash assets and more money kept invested.)

      Again when we talk about beating that ULIP with a MF plus term combination, what is the chief weapon in our hand……the term plan. Devised/structured by the same actuaries who is designing that ULIP also. And we think we can beat him at his game with his own creations? We think so because we do not consider how the products are designed in the first place. There is more to it than which looks obvious.

      There are so many crucial benefits available with the ULIP. Most important is the waiver of premium rider. In case of disability it would keep on building the corpus/capital. Can it happen with term+MF combo? A big NO. Forget about charges and all that for a moment.(If you choose a good premium multiplier in a ULIP, say more than 40, the charges get spread out over a large life cover and come within sensible range, better than a term+MF combo.)

      The ULIPs are necessary in a person’s portfolio. Rejecting them without proper understanding their structure and utility is not a wise way to plan our finances at all.

      shashank

      1. prabeesh says:

        @Shashank

        “The ULIPs are necessary in a person’s portfolio” i fail to understand this,i dont understand why its being bullied on every financial related magazines when its such a great product as you say?

        Its easy to say “Forget about charges” while that is the main reason many suggesting to stay away form this Product.

        “Year on year aren’t the insurance company or the fund managers concerned about it? They are not interested in rectifying the underperformance if any?” Well if they are doing why is the most MF(about70-80%) still performing below its index?..why cant this happen to ULIP fund managers too..in case of MF i can just stop n get out what about ULIP?

        A simple Term+MF will not beat the disability for which you need a rider on term or critical illness policy. Even if you put these together its lot cheaper than ULIP.

        I haven’t heard of any ULIP giving more than 10-15x of premium as SA.

        Assume a case where a person needs 50 lakh as insurance ,he takes a ULIP to pay premium of 50K/yr for policy which gives 10X. while the same can be achieved with lot less in term+mf combo

        I just fail to understand the need of ULIP in any person portfolio!!

  8. Siva says:

    I always prefer MF + Term Insurance combination because of better liquidity and easily can switch over to other funds if it doesn’t give better returns.

    To my experience, top rated MFs are giving better returns than ULIP.

    But the sad thing about Term Insurance is it not being issued to housewifes and students. This is a big concern and if you need insurance cover for them, you need to take savings plan only.

    Thanks – Siva

  9. Dominic Prakash says:

    And some other miscellaneous ULIP charges like
    Surrender Charges,
    Top up charges,
    Fund switching charges,
    Fund reallocation charges,
    Schedules Premium Holiday charges
    and other blood sucking charges.

    After paying all these charges the actual fund will suck high time and will give a worst performance.

  10. Ramesh Mangal says:

    ULIPs are better than MFs for investment.
    If the portfolio of both of them are able to give the same return over a long period of time AND If you do not want to liquidate your money earlier AND If you are very young (< 25 years), so that the mortality charges are less. THEN
    The ULIPs will overtake MF from 15th year onwards provided both of them give you a straight 10.00% of return per year. If the returns are choppy or more or less, that figure can change drastically!
    FMC is great for newer ULIPs and I am really impressed with 1.35% per annum. These MFs can charge a maximum of 2.5% (suckers!!). But how do I take into account the Policy Administration Charge of 0.13% per month (=1.56% per annum)? Also the mortality charge! And premium allocation charge of 2.5% and 1%. And some other miscellaneous charges!

  11. Aman, first of all, if you’ve taken term insurance, do not invest any more money in ULIP as of now. Any ULIP takes your money as charges on number of account like Premium allocation charges, policy admin charges, service taxes etc.

    For investments, it’s better to invest in equity diversified mutual funds like Reliance Regular Savings Fund – Equity, HDFC Equity Fund, etc.

    For comparison, why just compare FMC of mutual funds and ULIP? Why not all other charges? As of now, no ULIP can beat mutual fund even on same tenure and same returns.

    Hope it will help you.
    InvestmentKit.com

  12. bharat shah says:

    though i don’t know the charges for ULIP v/s. m.f. under new guide lines. one thing in favour of mutual fund is : better liquidity and better transferability, i.e. you can change the better scheme easily in case of need. may i know the term plan you preferred, if you do not mind?

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