"You know this cousin of mine has become a wealth manager," she said.

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This is a conversation I did not want to have.

"Are you listening to me?" she asked.

"I am," I replied. "Can I just finish reading this book?"

"Oh," she said, snatching the book from my hand, "you can read the book later."

"Tell me then."

"Well, this cousin of mine is a wealth manager and he has come up with an interesting investing proposition."

"Which is what?" I asked.

"Well, he wants me to buy this Unit-Linked Insurance Plan (Ulip), which has both insurance and investment built into it."

"Hmmm."

"Basically a certain portion of the premium will go towards insurance and the remaining premium will be invested in stocks and debt, depending on how I want to go about it."

"Yes, I know."

"Oh, and, he also said that since this financial year, there is a long-term capital gains tax of 10% on both equity and equity mutual funds. Ulips continue to be tax free on maturity."

"Which means what?" I asked, to test her knowledge.

"Well, if you hold on to an investment made in stocks or an equity mutual fund for a period of more than one year, and then sell it, the profit you make on it, is subject to a long-term capital gains tax of 10%."

"Interesting. You have now mastered tax laws as well."

"The credit goes to the company I keep," she replied.

"Ha ha."

"Let me give you an example. Let's say I invest Rs 1 lakh in an equity mutual fund today and sell it two years later for Rs 1.25 lakh. My profit or capital gains amount to Rs 25,000. I have to pay a 10% tax amounting to Rs 2,500, on this."

"Too much."

"Great," she replied, "now answer my question."

"So, yes, equity mutual funds and stocks now have a 10% long term capital gains tax, and Ulips don't. But the thing is…"

"Thing is what V?" she interrupted.

"First and foremost, the question is do you really need insurance. Like in my case, my parents are not dependent on me and I am single. Hence, a life insurance is basically useless for me. So, is the case with you."

"That's true."

"Secondly, when you invest in a mutual fund, you can figure out the past performance of the mutual fund and then make an investment decision. While, past performance is no guarantee of how well the fund will do in the future, it is still some sort of an indicator."

"I agree."

"Also, there are equity mutual funds which have withstood the test of time, been in the top quartile of performance, and have performed well across stock market cycles. It is very easy to identify these funds and invest in them."

"True."

"But more than this, it is next to impossible to figure out the best performing Ulip going around, given the complicated structure and charges of Ulips. An average human mind cannot comprehend the structure of a Ulip."

"So Ulips are complicated," she said.

"Indeed. Also, if you get stuck in a bad Ulip, you cannot get out because there is a lock-in for five years."

"Oh."

"Yes. In case of a mutual fund, you can get out at any point of time and that flexibility isn't available in case of Ulips, in the first five years. Of course, this would mean paying a tax, if there are capital gains. But it is always better to cut losses and and move on in life."

"Hmmm."

"Even if you have invested in a tax-saving mutual fund, and the investment has gone wrong, the lock-in in this case is three years, and not five years, as is the case with Ulips."

"I guess, what you say makes immense sense."

"I always do."

"What would I have done without you V!"

"Nothing really," I replied. "You would have found another V."

(The example is hypothetical)

Vivek Kaul is the author of the Easy Money trilogy