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ULIPs lower management fees must be matched by performance


Agents are selling ULIPs (Unit Linked Insurance Plans) saying that they have WAY lower management fees and they will therefore, in the long run generate better returns as compared to mutual funds. HDFC Insurance for instance has a 0.8% management fees versus typically 2% fees by regular mutual funds. Now over the long run, says HDFC Insurance, the difference in management fee and lower entry loads will make a huge difference and lead you to greater returns.

They typically show you a spreadsheet showing a comparative analysis, taking 2.5% as annual management fees for a mutual fund (the max. a fund can charge) + 2.25% entry load for your yearly investment. On the ULIP end, they reduce all the annual charges – 0.8% management fee, some monthly fees and some commissions. Then they assume both funds will grow at the same rate – say 10% – and demonstrate how, at the end of 20 years, ULIPs will yield a better return.

They may be right, but only if returns from mutual funds and ULIPs are similar. Let’s run a check over the last three years, for the ULIPs that really have existed that long.

A pure NAV comparison:

It is obvious here that ULIPs have severely underperformed mutual funds. For a three year period, the best performing ULIP returned 159%, and the best performing ELSS fund returned 252%. In fact, HDFC’s own tax saving mutual fund returned 75% more (over three years) than its insurance growth fund!

I have not considered ALL mutual funds – only tax saving funds. The results are worse for ULIPs if you consider strong growth funds like Reliance Growth, SBI Magnum Global etc. I have also disregarded any shorter term than three years – it doesn’t make too much sense to compare in those terms.

If ULIPs are to really go away from paper spreadsheets and beat mutual funds as an investment product, they must pull up their socks and perform. Their claims of lower management fees only makes financial sense if they yield as much or better returns.


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