Types of ULIPs
Depending on the purpose of investment ULIPS can be divided into the following types:
ULIPs for Retirement Planning: These plans accumulate a portion of your savings over a period of time and the corpus amount is made available to the policyholder at maturity for purchasing an immediate annuity plan.
ULIPs for Child Education: These plans aim at providing financial support for expenses related to children like education, marriage etc.
ULIPs for Wealth Creation: There are many ULIPтАЩs with the objective of accumulating wealth over time which will help the policyholder beat the rising costs by offering return on investment.
ULIPs for Health Solutions: Keeping in mind the rising medical expenses, these plans allow the policyholder to claim for health related expenses of any kind. Some plans may also fund your future health insurance charges.
Most insurers offer a wide range of funds to suit oneтАЩs insurance and investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund
The following are some of the common types of funds available in India, along with an indication of their risk characteristics.
Nature of Investment
Primarily invested in company stocks with the general aim of capital appreciation
Medium to High
Combining equity investment with fixed interest instruments
Income, Fixed Interest and Bond Funds (also known as debt fund)
Invested in corporate bonds, government securities and othe
r fixed income instruments
Cash Funds (also known as secured fund)
Sometimes known as Money Market Funds тАФ invested in cash, bank deposits and money market instruments
As we can see, equity funds invest largely in equity and carry higher risk. These funds are preferable for young investors with higher risk appetites. Income, Fixed Interest, Bond and Balanced funds provide lesser risk then equity funds. Middle aged investors with medium risk profile can opt for balanced funds that invest only part of the corpus in equities. Cash funds are an ideal option for risk-averse customers.
ULIPs v/s Mutual Funds
LetтАЩs see how ULIPs fare in comparison with Mutual Funds in various attributes:
Mutual Funds are easy to understand products, especially equity mutual funds. Whereas, ULIPs are slightly complex as they are structured products. However, the recent regulatory changes have to a great extent decreased the ambiguity from these products and hence they are easier to understand now.
2. Cover Amount (Sum Assured)
Mutual funds do not have any life cover built into them so there is no concept of life cover (sum assured) out here. Life cover is the money paid to the policyholderтАЩs family if he/she dies. In ULIPs, on death, either the higher of the cover amount or the fund value of the ULIP is paid out, or both the fund value and cover amount is paid out тАУ this depends on what type of ULIP you have.
There are no entry loads in a MF. In fact, this is one of the biggest differences between ULIPs and mutual funds. The only charge that investors incur is a recurring charge on the NAV that a MF is subjected to depending on its type and corpus. Compare that with ULIPs, there are many charges, some of which get deducted from the premium and others from the fund value. This is precisely why ULIPs are considered expensive in the beginning as most of the charges hit you in the initial few years. This is also the reasons why it is advised to stick to ULIPs for a longer term, preferably for a minimum of 10 years before you begin to see some good returns.
Mutual funds are cheaper, but only in the short run. Over a long period ULIPs may give you a better return over Mutual funds as the fund management charges are lower than mutual funds.
4. Lock-in Period
Lock-in period is the minimum period for which an investor needs to stay invested in a fund/plan without attracting any penalty on complete withdrawal (i.e. surrender). When you invest in ULIPs, your money is locked in for 5 years, so this directly affects your ability to surrender or pull out the money in case of an emergency; however, ULIPs give you flexibility to partially withdraw from the fund as and when needed.
In mutual funds, there is no lock-in except when you buy tax saving mutual funds also called Equity Linked Saving Schemes (ELSS). These get locked in for 3 years so money is not available to you should you need it. But in all the other types of MFs, you can withdraw your money after a year without any penalty. However in the case of ULIPs the idea is to get life cover along with the returns and hence the question of withdrawing before 5 years ideally should not arise.
Even though Mutual Funds offer a lot of simplicity and flexibility in terms of investment options and withdrawal, they simply cannot provide the risk covering capabilities of a ULIP. For long term investors ULIPs can be the best available investment avenue. However it is the investor who needs to choose what is best for him depending on his/her financial goals.
The investment space is filled with options and you should look at them, identify your financial needs and then choose the right product.