In an infographic on the benefit of Unit Link Insurance Plans (ULIPs) over mutual funds, moneycontrol.com along with Bajaj Allianz, in the name of investor education, is providing its readers with incomplete information. None of the four benefits they mention are a real benefit to the investor as we explain later. Moneylife has often written about how ULIPs are among the most toxic products for customers. ULIPs entail high costs, unlike mutual funds. However, the illustration mentions none of this. An investor needs to be told the complete truth and should be made aware of the risks and costs. Unfortunately, the investor is left to learn the hard way. This is not the first time a company has promoted just the benefits of its products in the name of investor education. We wrote about a couple of such cases in the past as well—How this NSE ad misleads – in “investor’s interest”  and Mutual Fund Advertising: Deceptions galore

Let’s take a look to see how this illustration from moneycontrol.com does not provide the complete picture.

Dual benefit of ULIPs?
“ULIPs provide the benefit of insurance and investment, while mutual funds are only for investment,” depicts the inforgraphic. In reality, mixing insurance and investment leads the consumer to be underinsured and investment stuck for five years if you are not happy with the performance. Mortality charges levied by ULIP for risk cover is much higher than what you will pay for online term plan. Even online ULIPs charges high mortality charges and hence there is no benefit for the cost you pay for the actual insurance cover.

They also fail to mention the cost at which this ‘dual benefit’ comes. ULIPs fleece investors through administration charges, fund management charges, mortality charges, premium allocation charges and a host of other service charges such as fund switching charges, partial withdrawal charges etc. These costs are not defined as a fixed percentage charge. Not to forget, there would be surrender charges as well if you plan to exit within five years.

On the other hand, acitvely managed equity mutual fund schemes charge a single expense ratio which is anywhere between 1.25% to 3% annualy, which is inclusive of fund management charge, distributor charge, administration fee etc. There may be an exit load if the investor chooses to redeeem before a certain period. The period may range from 3 months to 18 months and varies from scheme to schemes. If an investor chooses an index scheme or the direct plan of a scheme, the charges would be lower. Debt MF schemes and liquid MF schemes have lower charges.

MFs ideal for short to medium term?
The author needs a dose in financial literacy. Investments in any equity-linked product should be ideally kept for the long-term. We are still clueless from where the author got this opinion that mutual funds are ideal for the short to medium term. If he/she means that an investor can get the same returns in a mutual fund over a short period as compared to a long-term in ULIP, then they may be right. The chairman of LIC has himself admitted in an interview that for the net asset value of a ULIP to rise by 10% the Sensex should rise by 40%. Read- Startling admission of LIC Chairman: ULIPs are a loot

Tax benefits
Tax benefits under 80C is allowed for ULIP only if the sum assured is 10 times the premium (five times for policies sold before April 2012). Many ULIPs do not offer such cover for those over 45 years. Many single premium ULIPs also fail to offer the required cover with respect to the premium paid. Unfortunately, the consumers do not even know about it and the sellers are least bothered to make clarifications. The worst shocker is at the time of maturity when the full corpus is taxable without deducting the premium. Union budget 2014-15 levying 2% TDS (tax deducted at source) is precisely to track such policies and to make the insured pay taxes on policies that do not qualify for tax-free corpus.

The fund performance of tax-saving mutual funds would probably be better than that of ULIPs factoring in the costs. Even if one chooses a term insurance they can get tax benefits under Section 80C. There are many other investment products available under section 80C such as public provident fund, tax saving fixed deposits, equity linked savings scheme  etc. Read here for more: Section 80C exemption: Choose your investments

Switching investments?
ULIPs may offer investors the first few switches free, but once the limit is exhausted, the investor would need to pay for switching assets from one fund to another. Mutual fund investors too can switch from one fund to another, within the same fund house, however, there can be transaction costs, tax implications and exit loads. Other than that, an investor can switch between funds as many times they like without any additional charges levied by the fund house. Unless an investor can accurately time the market, switching investments would be of no benefit to the investor.