Ulips are more expensive than MFs (BS 3rd Dec 2012)

NEHA PANDEY DEORASThe new marketing line amid insurance agents is “ unit- linked insurance plans ( ulips) are cheaper than MFs”. This argument is based on the expense ratio that mutual funds charge vis- a- vis Ulips. But ask a financial advisor and he will strongly advocate a mutual fund for investment purposes and a term plan for insurance. Even in terms of overall costs, an MF score. In September 2010, the Insurance Regulatory and Development Authority ( Irda) had issued guidelines for Ulips, aimed at capping the charges on the product, which in the first year could be as high as 100 per cent of the premium. The guidelines were a huge help for customers. In August 2012, the Securities and Exchange Board of India ( Sebi) introduced measures for the insurance sector. Sebi allowed funds with assets worth less than ₹ 100 crore to charge 3.12 per cent in expense ratio annually. This led many to believe that mutual funds have become expensive, compared with Ulips. Such a notion, however, might be misplaced. For one, Ulips levy more than one cost in the first five years of investment but MFs don’t. For another, Ulips charge under various heads such as premium allocation charge ( PAC), fund management charge ( FMC), policy administration charge, mortality charge, et al, while the MF only levies an expense ratio ( the fee charged by a fund house to manage and operate the fund). Therefore, despite a higher expense ratio, MFs work out cheaper than Ulips. Sumeet Vaid, founder and CEO of Freedom Financial Planner, says Ulips are expensive products and, hence, should not be used as an investment vehicle. While insurance plans are best for risk coverage, Vaid advises one to stick to MFs for investment needs. Sample this. HDFC SL Progrowth Flexi charges 7.50 per cent as PAC and 1.35 per cent as FMC in the first policy year. However, the plan does not levy any policy administration fee and mortality depends on the age to be insured. The cost of investment in the first year is 8.85 per cent ( excluding mortality). For instance, if you are paying apremium of ₹ 5 lakh for a ₹ 50 lakh cover, your cost of investment in the first year would be ₹ 44,250. The product levies a similar charge in the second year. However, in the third, fourth and fifth years, the charges decrease by two per cent. From the sixth year, the policies do not charge PAC but a policy administration fee is charged at ₹ 6,000 per annum or 1.2 per cent, whichever is lower. FMC continues to be levied at 1.35 per cent every year. Similarly, Aegon Religare iMaximize Plan does not levy a PAC but it charges a policy admin fee of ₹ 1,200 a year and FMC of 1.35 per cent annually in the first five policy years. Taking the above example, the cost of investment would be ₹ 7,950 yearly ( FMC of ₹ 6,750 + ₹ 1,200). This is besides mortality fee, which increases with age. Five years of investment is considered because the lock- in period for Ulips is five years. Bajaj iGain III is an even more expensive product. It levies a PAC of two per cent, FMC of 1.35 per cent, and varied policy admin fees. In the first year, the investment cost would be ₹ 17,134. In the second year, the cost is ₹ 17,153, in the third year ₹ 17,173, and so on. This excludes mortality fee. We assume the investor will stay invested throug the policy term. However, if the investor wants to discontinue the policy, there are charges for that as well. All the three policies mentioned above charge six per cent of the annual premium or fund value not exceeding ₹ 6,000 in the first four policy years. In comparison, HDFC Top 200 ( an equity diversified mutual fund scheme) levies only 2.87 per cent of the investment as expense ratio. For an investment of ₹ 5 lakh, the scheme would deduct ₹ 14,350. Birla SunLife Equity ( an equity diversified mutual fund scheme) charges 3 per cent annually, or ₹ 15,000, and DSP Equity charges between 2.59 per cent and 2.85 per cent in the first five years of investment. That is, between ₹ 12,950 and ₹ 14,250. Here, 0.5 per cent has been added to the historical expense ratios, because the expense ratios are likely to go up on the back of the new regulations. While mutual funds can give 10- 12 per cent annually, financial planners say Ulips mostly give seven- eight per cent annually if you have invested only in equity schemes. Take your pick. Mutual funds 0.5% has been added to historical ratios as expense ratios are likely to go up due to new regulations HDFC BSL DSP Top 200 Frontline Equity  Year 1 2.87 3.00 2.85 Year 2 2.69 3.00 2.88 Year 3 2.70 3.00 2.79 Year 4 3.00 3.00 2.61 Year 5 2.40 2.85 2.59 BREAK- UP OF PLANS ( in ₹) Premium Fund mgmt Policy allocation charge charge administration charge Discontinuance/ Surrender charge HDFC SL Progrowth Flexi Year 1 7.50% 1.35% Nil Lower of6% * annual premium or fund value or notexceeding 6,000 Year 2 7.50% 1.35% Nil Lower of4% * annual premium or fund value or notexceeding 5,000 Year 3 5% 1.35% Nil Lower of3% * annual premium or fund value or notexceeding 4,000 Year 4 5% 1.35% Nil Lower of2% * annual premium or fund value or notexceeding 3,000 Year 5 5% 1.35% Nil Nil Year 6+ Nil 1.35% 6ka year or 1.2%, p. a. whichever is lower Aegon Religare iMaximize Plan Year 1 Nil 1.35% 1,200 a year Lower of6% * annual premium or fund value or notexceeding 6,000 Year 2 Nil 1.35% 1,200 a year Lower of4% * annual premium or fund value or notexceeding 5,000 Year 3 Nil 1.35% 1,200 a year Lower of3% * annual premium or fund value or notexceeding 4,000 Year 4 Nil 1.35% 1,200 a year Lower of2% * annual premium or fund value or notexceeding 2,000 Year 5 Nil 1.35% 1,200 a year Nil Year 6+ Nil 1.35% p. a. 1,200 a year Bajaj iGain 3 Year 1 2% 1.35% 384 a year Lower of6% * annual premium or fund value or notexceeding 6,000 Year 2 2% 1.35% 403 a year Lower of4% * annual premium or fund value or notexceeding 5,000 Year 3 2% 1.35% 423 a year Lower of3% * annual premium or fund value or notexceeding 4,000 Year 4 2% 1.35% 444 a year Lower of2% * annual premium or fund value or notexceeding 2,000 Year 5 2% 1.35% 467 a year Nil Year 6+ 0% 1.35% 490 a year