Towards the end of the year, a horde of salesmen will descend to sell you ‘Tax Saving’ Investment products.

One of these is ULIP’s, short for Unil Linked Insurance Plans. To the unsuspecting, they are sold as mutual funds.

However, the two are very different.

Mutual Funds

  • Any amount from Rs 500 upwards can be invested
  • Flexible (Open ended funds allow you to withdraw money anytime you wish)
  • Zero Entry Fee
  • Low Management Costs (They can charge a maximum of 2.8% as fees at the end of the year)
  • Agents usually make a commission of 0.5 to 1%
  • Have no Insurance cover
  • Purely an investment Option
  • Have a tax saving option too in the form of ELSS

ULIPs

  • Usually have a larger amount that needs to be invested regularly for a few years
  • Locked (Funds are usually available after a couple of years)
  • High Costs (Fees include insurance premium + management fees – Can go up to 40% in year 1) and that too upfront
  • Agents usually make a larger commission of 5 to 10% in year
  • Have very limited Insurance cover (e.g. 5 to 10 lakhs)
  • Sold as an Investment Option along with insurance cover
  • Have a tax saving option too

If you are looking to invest your money, need flexibility with higher growth, stick to mutual funds. This is simply because they have lower costs which means a larger part of your money is actually getting invested. You can also evaluate Equity Linked Savings Scheme (ELSS) option for tax saving purpose. There is a lock-in period of 3 years for ELSS but the lock-in is still the least in comparison with other tax saving option.

Our Opinion: We believe ULIPs are toxic and you should stay away from them. 

What should you do: Invest in a combination of Mutual Fund SIPs for growth + a pure term plan for Insurance Cover.

Talk to Us to get a second opinion before you invest your money