Saturday, 21 May 2016

Mutual Funds Versus ULIP

In this article you will be able to understand how beneficial it is to have remained invested in Mutual Fund versus ULIP

For our example, Lets take Example of ICICI Pru Guaranteed Wealth Protector Plan 
Didn't that word "GUARANTEED" immediately appeals you, and we prefer to invest in avenues where the principal amount is safe. It may not be wise, but that's our immediate reaction when asked about investing. But that is where we are wrong and many insurance agents even doesn't know what does the term guaranteed means 

Lets go ahead with our Example 
ICICI Pru Guaranteed Wealth Protector Plan is a ULIP plan where you have premium paying term of 1 year and 5 years with a lock in period of 5 Years.
In case if you paid a premium for 5 Years then Sum Assured is 10 times and for Single Premium it is 1.25 Times.
ICICI Pru Guaranteed Wealth Protector Plan will be investing 60% in Equity Market and 40% in Debt Market with Life Growth & Life Income Fund respectively which would be reduced to 90% in Debt & 10% in Equity at the end of 10th year that is maturity year 
You will get tax benefits on premiums paid as per section 80C so in our comparison we would also include a Tax Savings (Balanced) Mutual Fund

Annual Premium : Rs 1,00,000 
Sum Assured     :  Rs 10,00,000
Age at Entry       :  35 Years 
Model of Premium Payment : Annual 
Premium Paying Option : 5 Years 
Assured Benefit at Maturity : 5,05,000

Now Let us calculate the charges levied by fund 
Premium Allocation Charges are 6%,5%,4%,4% in annual premium payment mode for 1st , 2nd , 3rd , 4th and 5th year respectively , After 5 Years there are no charges 
Policy Administration Charges are from 1st to 5th year 0.21% p.m. (2.52% p.a) and from 5th year onwards 0.10% (1.20% p.a)
there is also a charge called Fund Management Charge which is adjusted against NAV 
Below are the details for units accumulated

Nav for ICICI Pru Guaranteed Wealth Protector - Life Growth Fund as on 20/05/2016 is 13.09

Below are the details for units accumulated

Nav for ICICI Pru Guaranteed Wealth Protector - Life Income Fund as on 20/05/2016 is 12.5512

Fund Value as on 20/05/2016
13889.33 X 13.09 = Rs 181,811
9901.14 X 12.512 = Rs 123,883
Total                     = Rs 305,644
Since you paid 3 years premium amount to Rs 3 Lakhs and currently your fund value is 305644 a gain of Rs 5644 and XIRR 6.39% p.a. along with an insurance of 10 Lakhs 

If we buy only mutual funds then we wont be able to cover the insurance part, since insurance is not an investment but a risk mitigation tool we would go ahead with Term Insurance for a male aged 35 years and rest would be invested in SIP in Birla Sun Life Tax Relief 96 (Growth Fund).  I have written an article on "How much insurance do i need" which would help you to select the exact insurance amount
Well, The reason for selection of Birla Sun life tax relief is, it is a Tax Savings and Balanced fund with target allocation of 80%equity & 20% debt and money market securities.


From the above image we had to pay a premium of Rs 5254/- p.a + service tax 761.83 = Rs 6,015 every year 

We would be investing 
1,00,000 (Original Premium)
-   6,015 (Term Insurance Premium) 
=93,985 divide by 12 i.e 7,832 rounding off Rs 7800 in SIP

In ULIP you would have paid premium every 1 year and SIP you pay monthly , but remember you are paying your premium advance to Insurance Companies and that is not the case in SIP and logically you are losing Interest on the premium amount paid initially to insurance companies.

SIP Calculation is below where in we would have paid 210600 for 27 months and our investment value appreciated to Rs 237828 as on 20/05/2016

Remember : We haven't purchased units of Rs 1 Lakhs in third year instead we are going with SIP mode that is the reason our investment is still below 3 Lakhs compared to ULIP.

Below is the calculations where every year we have purchased a lump sum of Rs 93,985 for Birla Sun life tax relief fund

from the above sheet it is clearly visible that Mutual Funds Versus ULIP, MF always have an upper hand 

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