Stayed put in Ulips since 2008? You've beat equity MFs

As the debate between unit-linked insurance plans (Ulips) and equity mutual funds rages on after the introduction of long term capital gains (LTCG) tax, an analysis shows that the insurance investment products have beaten their large-cap and small/mid-cap mutual fund counterparts in terms of category returns for the ten-year period ended February 28, 2018.

According to the data, large-cap insurance Ulips delivered 9.11% annually versus 8.7% by large-cap equity funds. In the same period, insurance small/mid-cap equity category average gain stands at 14.65% annually versus 14% for small/mid-cap mutual fund category average.

For those who think the 0.4-0.5% extra gain annually does not matter much, here is some math. At the Ulip large-cap category average of 9.11%, a sum of Rs 10 lakh would grow to Rs 23.91 lakh in 10 years. For the large-cap MFs, the same Rs 10 lakh invested would become about Rs 23 lakh at 8.7% annual return. For the small/mid-cap Ulips growing at an average 14.65% annually over 10 years, a sum of Rs 10 lakh would become Rs 39.24 lakh, but for the MF peers growing at 14%, the sum would be Rs 37.07 lakh, or Rs 2 lakh less than Ulips.       

Ulip fund categories for large-cap and small/mid-cap have managed to give nearly equivalent returns to MFs in other tenures. In the time periods of three and five years, large-cap Ulip funds have delivered 7.59% and 15.32% versus 7.61% and 15.5% by large-cap MFs. Similarly, small/mid-cap Ulip funds in three and five year time periods have notched up 15.6% and 23.92% versus 15.11% and 26.36% by small/mid-cap MFs.

For risk-adjusted returns (Sharpe Ratio), insurance category average has outperformed the MF peer category over most time periods i.e. three years, five years and 10 years.

Insurance fund categories also have relatively lower downside capture ratios than MF peer categories over various time periods like three years, five years and 10 years. This indicates that they have managed to protect downside risk relatively better. However, the upside capture ratios of mutual fund categories are generally higher than that of peer insurance across time periods.

"Ulips have undergone a significant change over the last few years in terms of cost structure, and the new age Ulip now have a lot better cost structure to the customer as the distribution efficiencies have been passed on to the customers," said Sampath Reddy, chief investment officer, Bajaj Allianz Life Insurance.

Coupled with very good fund performance of the Ulips relative to the market, they have become an attractive vehicle for investors. This should lead to the investors coming back to the new age Ulips, said Reddy on the sidelines of the launch-event of Bajaj Allianz Life Goal Assure ULIP.

Ulips undoubtedly have an upper hand with the introduction of LTCG tax and by choosing a right plan one can get attractive returns that continue to remain tax-free under current norms. However, Neil Borate, personal finance analyst at Rupeeiq, feels that Ulip charges borne by the investor can ultimately change the final return scenario.

"A lot of Ulip charges that affect final investor returns are unfortunately not reflected in the net asset values of Ulip funds. They are either levied by reducing the premium invested in the Ulip fund or simply by cancelling fund units held by the investor," said Borate.

A few examples include premium allocation charge, policy administration charge, mortality charge, premium redirection charge and discontinuance charge. "These charges are a direct result of mixing insurance and investments which Ulips do and mutual funds do not. In the latter, the NAV you see, is the NAV you get," Borate said.