Ulips vs mutual funds: Which will give you better returns?

Ulips versus mutual funds debate is more than a decade old. Both vie for the same pie of retail investors who want to grow wealth over the long-term and seek market-linked returns. Over the years, the fortunes of both financial instruments have fluctuated due to market swings and regulations.

The announcement of long-term capital gains (LTCG) tax on equity investments in the Budget has stirred things up again. So how do these two instruments stack up against each other?

Equitable in equities

In the large-cap and mid-cap categories, there isn’t much to choose between the two. While Ulips have beaten mutual funds in terms of three-year-returns in the small-and-midcap category, there is a role reversal in the five-year-return period, with mutual funds pipping Ulip funds by a margin of 250 bps.

In the balanced fund category (conservative allocation) mutual funds have outperformed Ulips consistently, but marginally. The former notched up 7.75% and 9.74% in threeyear and five-year periods respectively, while Ulip funds posted 7.37% and 9.21%.

Ulips’ debt burden
In the short-term bond category, mutual funds yielded 7.30% against 6.6% posted by Ulip funds in the three-year period. The former scored over the latter in the ultra-short bond category too.

This can be attributed to lower expense ratios in debt mutual funds, which range from 0.28% to 1.48%. On the other hand, Ulip debt fund options attract fund management charges of 0.65% to 1.5%.

TOP PERFORMING ULIP FUNDS
These Ulip funds have given the highest returns in their categories.

While returns factor in fund management charges, Ulips also come with premium allocation, policy administration and mortality charges that eat into final returns.

“Comparing mutual funds and Ulips purely from an ‘investment’ perspective may not be appropriate. The cost of a Ulip includes mortality charges, management fees for the underlying fund besides other administrative charges. One may consider Ulips if there is a primary need for insurance coverage and not otherwise,” says Dhaval Kapadia, Director, Morningstar Investment Adviser India.

Returns of Ulips, MFs are almost similar

Returns are as of 23 april. Returns of time period more than 1 year are annualised. No AUM filter has been applied. Performance of ulip funds is net of fund management charges only, Plan level expenses are not included Source: Morningstar India

The recurring premium commitment in Ulips creates an element of inflexibility, but may help investors who lack discipline, as they are aware that failure to service premiums could lead to the policy lapsing.

“This product category has features such as waiver of premium, disability and critical illness covers in addition to tax-free survival benefits. Ulips thus fulfil long-term goals even in the case of an eventuality,” says Chinmay Bade, Vice-President, Products, HDFC Life Insurance