Rude shock for too much ULIP to lift equity mutual funds

Equity mutual funds are expected to benefit from a Union Budget move to introduce taxes on investments in unit-linked insurance plans (ULIPs) exceeding ₹2.5 lakh in a fiscal year.

Several rich investors have been pouring money into ULIPs — stock market-linked insurance plans similar to equity MFs — since the reintroduction of long-term capital gains tax in equities. ULIPs had been exempt from taxes on gains made from the product.

“As tax status on the two products comes at par, we can expect to see increased flow into mutual fund schemes from HNIs,” says G Pradeepkumar, CEO, Union Mutual Fund.


Taxation was the biggest factor that prompted investors to choose ULIPs over equity mutual funds. After long-term capital gains (LTCG) tax on equities was brought in from April 2018, many HNIs shifted their investments to ULIPs as they continued to enjoy a tax-free status. Investors in equity MFs pay 10% long-term capital gains tax on units sold after a year. In debt mutual funds, if they hold for over three years, the long-term capital gains tax is at 20% with indexation benefits.

Investment advisors said equity mutual funds are better products in terms of liquidity, transparency, flexibility and lower costs. “Investors can change a scheme or a fund house if it is not performing well, know the exact expense that is being charged to them, opt for a scheme with a lower cost or a plain index fund,” said Harshvardhan Roongta, CFP, Roongta Securities.