132 DALAL STREET INVESTMENT JOURNAL I JULY 22 - AUG 4, 2019 DSIJ. in^
MF page - 04
Cover Story
policyholder if he remains fit and alive, most of the insured
persons thought they were not getting anything out of his
policy. Hence, such term insurance policies were not picking
up or selling.
So, to increase the sales via making an insurance product more
appealing, the insurance companies may have come up with
insurance policies that would invest, along with providing life
insurance cover. This seems appealing because in the earlier
version, you were not getting anything back on survival.
However, with the latter, you would be getting monetary
benefit even if you are alive. So, is there anything wrong with it?
No, not at all, if it provides you better returns than other
investment products.
The study
To understand what is better for you, life insurance or other
investment products, we have compared it with only mutual
funds. There are other investment avenues such as national
pension schemes (NPS), PPF, which have been excluded from
our study.
In case of life insurance products, we have included
ULIPs (specifically multi-cap funds), endowment plans
and money back policies. Since investment in insurance is
eligible for tax deduction, we have taken ELSS from mutual
fund as investment in ELSS allows its investor to avail tax
benefit.
For all our study, we have assumed two types of investors. Ravi,
who firmly believes in insurance as best investment product,
while his friend Karan is a fan of mutual funds.
ULIP Vs Mutual Funds
Mutual funds and ULIPs sound similar as both these products
are market-linked. However, the biggest difference between
them is in terms of product structure and regulations. As far as
product structure is concerned, ULIPs despite being a market-
linked product, comes with life cover. On the other hand,
mutual funds are also linked to the market, however, there is no
life cover whatsoever (except for SIP sure schemes). In
regulatory terms, ULIPs being insurance product, comes under
IRDAI (Insurance Regulatory and Development Authority of
India), whereas mutual funds come under the purview of SEBI
(Securities and Exchange Board of India). Following is the
illustration to understand whether to invest in ULIP or in
mutual fund.
Illustration : There were two friends Ravi and Karan. Ravi
believes in investing in ULIP, whereas Karan believes in mutual
funds. Ravi bought a ULIP policy with premium of 10,000, which he pays on a monthly basis. In ULIPs around 3 per cent to 5 per cent of the premium goes towards insurance and the remaining is invested in market-linked funds just like mutual funds. Ravi would get insurance cover of12 lakh (10 times of
annual premium).
Karan decides to segregate investment and insurance and hence
he takes a term insurance of `12 lakh for which he would pay a
premium of `380 every month and the remaining `9,620 would
be invested in an ELSS fund, which is generating worst return of
the category. Here, it is assumed that both Ravi and Karan are
30-year old males, do not consume tobacco and would be
investing with an investment horizon of 20 years.Average Trailing Returns(08 July 2019) on ULIP and ELSS
Investment
Type1-Year
Returns (%)2-Year
Returns (%)3-Year
Returns (%)5-Year
Returns (%)10-Year
Returns (%)
ULIP 1.9 3.29 7.25 6.92 8.06
ELSS 1.31 4.2 10.08 10.87 13.55If we look at the above returns, we can say that other than
one-year returns, ELSS scores in all other periods, assuming
that for the 20-year period, on an average ULIPs would get 8
per cent and ELSS would get 13 per cent (same as 10 year
returns). Having said that, Ravi with total investment of
`23.28 lakh at the end of 20 years would end up having
`57.52 lakh and Karan even though has invested `23 lakh,
which is slightly less than Ravi, at the end of 20 years would end
up with a whopping `1.1 crore, which is 91.23 per cent or 52.48
lakh more than Ravi's corpus. Here, we have ignored the LTCG
tax for ELSS and costs other than the fund management fees for
ULIP. Even if we assume the taxation part, then Karan has to
pay LTCG tax of `10.92 lakh and would end up having post-tax
value of `99.28 lakh, which is still 73 per cent or 41.76 lakh
more than Ravi's corpus. Both Karan and Ravi are eligible for
deduction under section 80C.Endowment Vs Mutual Funds
An endowment policy is a life insurance contract designed to
pay a lump sum after a specific term or on death. Typical
maturities are 10, 15 or 20 years up to a certain age limit. Some
policies also pay out in the case of critical illness. There are
many people who prefer endowment plans over mutual funds.
This can be due to lack of awareness about mutual funds or
hard sales done by the life insurance agents. So, with the help of
illustration, let us find out which is better: endowment plans or
mutual funds? Here also, we have specifically considered ELSS
along with term plan for mutual fund investor to make it a fair
comparison.Illustration: In continuance with the ULIP illustration, Ravi
decided to stick with insurance as an investment, whereas Karan
still believes in mutual funds. This time around, Ravi went on to
try an endowment plan with a tenure of 20 years and a sum
assured of `12 lakh for which he needs to pay premium of 70,500
annually. Karan decided to stick with the ELSS. In case of Ravi,
he needs to pay the premium annually and would receive sum
assured on survival on maturity i.e. 20 years from now. He is also