How Ulips Compare With MFs

It's generally accepted that Ulips are not as investor-friendly as mutual funds. They allow no easy exit, and have relatively higher charges than MFs

It is a generally accepted notion that unit-linked insurance plans (Ulips) are not investorfriendly due to their relatively higher charges and lack of flexibility in exiting from a policy, apart from shifting from one sub-fund to another. It is usually recommended that investments should be executed through mutual funds (MFs), and for matters of insurance coverage, you should buy term insurance.

This view is correct. However, today we will look at certain other aspects of Ulips. If you are approached to buy a Ulip, or if you are considering one and want to compare it with mutual funds, then here are the things you should be looking at.

Factors For Comparison

The most important element for comparison, is the charges on the product. You may say performance is most important as that is what you get as returns, net of charges. However, future performance is by definition, unknown. You can look at historical performance for only getting a perspective.

If a Ulip fund is underperforming, you can shift from one fund to another like from equity to debt, but it is difficult to exit from the product.

Charges are the biggest contention between Ulips and mutual funds, and it is something measurable.

Quantifying Charges

In Ulips Long ago, Ulips came with very high front-loaded charges, which was deducted from the premium that you paid, and was passed on to the intermediary. Even now, there are front-loaded charges that are on the higher side.

From the earlier days of excessive front-loaded charges to current times of relatively-lower-but-still-onthe-higher-side charges, there was a regulation passed by the Insurance Regulatory and Development Authority of India (Irdai) in 2010. Rather than putting a cap on frontloading per se, the cap was put on overall charges. This was referred to as "reduction in yield".