{"id":229,"date":"2018-09-26T17:08:29","date_gmt":"2018-09-26T11:38:29","guid":{"rendered":"https:\/\/srinivesh.in\/blog\/?p=229"},"modified":"2019-03-27T21:55:40","modified_gmt":"2019-03-27T16:25:40","slug":"no-ltcg-on-equity-does-not-make-ulips-better","status":"publish","type":"post","link":"https:\/\/srinivesh.in\/blog\/no-ltcg-on-equity-does-not-make-ulips-better\/","title":{"rendered":"NO – LTCG on equity does not make ULIPs better"},"content":{"rendered":"

Unit Linked Insurance Plans (ULIPs) have always been aggressively positioned in India.\u00a0 The recent (re)introduction of Long Term Capital Gains (LTCG) Tax on equity has added another dimension to the promotion of ULIPs. In this illustrative post, we look at how Equity mutual funds still provide better post-tax returns due to their flexibility and choice.
\n<\/span><\/p>\n

What are ULIPs<\/span><\/h2>\n

We assume that the reader is familiar with ULIPs. In short these products combine investment with insurance. Your investment (net of charges) goes into a fund that works just like a mutual fund. The funds are managed by the insurer and you have to choose only from the handful of options. Fund management charges, as well as the insurance charges, are deducted from the value of the fund. <\/span>
\nFor more information, you can read this link from HDFC Life<\/a>. (For illustration, this articles uses information on products from the HDFC group.)<\/span><\/p>\n

Comparison Scenario<\/span><\/h2>\n

Since insurance itself is a must-have for any investor, the appropriate comparison would be\u00a0 this: a) ULIP\u00a0 vs b) Mutual Funds + Term Insurance.\u00a0 We would use this comparison. To help the comparison, all the assumptions will be biased in favour of ULIPs.
\n<\/span><\/p>\n

Insurance Charges\/Mortality rates<\/span><\/h3>\n

In a term insurance plan, the premium amount is paid as per the schedule. In an ULIP, the mortality charges are deducted from the fund value by cancelling units. Mortality charges themselves are well researched and regulated. For simplicity, we will assume that the effect on the investible amount is the same in both cases. i.e. The buyer pays 16,000\u00a0 for the ULIP (of which Rs 1,000 is used for mortality charges); for the second scenario, the buyer pays Rs 1,000 for the term insurance premium and invests Rs 15,000 in the chosen mutual fund.\u00a0<\/span><\/p>\n

Fund Management Charge\/Expense Ratio<\/span><\/h3>\n

In mutual funds, the published NAV is net of expenses.\u00a0 The ULIP funds deduct a fund management charge. It is not clear if the indicated returns are inclusive of the charges are net of the charges. Some insurers suggest that the daily unit price is net of charges. An example is the statement from HDFC Life:\u00a0 <\/span><\/p>\n

“The daily unit price is calculated allowing for the deduction of the fund management charge, which is charged daily.” <\/span><\/p><\/blockquote>\n

For simplicity, we would assume that the returns are net of the charges for ULIPs. This then makes them similar to mutual funds.\u00a0 (Note: Most direct plans in equity have TER comparable to or less than typical fund management charges.\u00a0 For debt, the fund management charges are higher than the TER of debt funds.)<\/span><\/p>\n

Other charges<\/span><\/h3>\n

There are plans, particularly online, which have low or zero other charges – premium allocation charges, administrative fees, etc.\u00a0 For simplicity, and to err on the side of ULIPs, we would ignore all these charges. <\/span><\/p>\n

The three comparisons put together make the comparison straightforward – we directly compare the published returns and expected returns. <\/span><\/p>\n

ULIP choice<\/span><\/h2>\n

Every life insurance provider in India has a number of ULIP products.\u00a0 A lot of these companies also have associates in the mutual fund business – SBI Life and SBI AMC; HDFC Life and HDFC AMC; ICICI Pru Life and ICICI Pru AMC, etc. The insurance comparison websites provide a view of the various features of the ULIPs.\u00a0\u00a0 One such comparison is below. (Assumption: Payment of Rs 20,000 every month for 12 years)<\/span><\/p>\n

\"LTCG<\/p>\n

The difference in estimated returns is due to the variety of charges. The historical performance of the funds, as well as the choice of funds, vary across the insurers.\u00a0 Balancing all the factors, we would choose HDFC Life Click2Invest\u00a0\u00a0 The performance snapshot of the 8 funds is below.<\/span><\/p>\n

\"LTCG<\/p>\n

Among the funds, we would choose the Blue Chip Fund. Based on this, we would also select the category of large cap in mutual funds. Large cap funds provide a better balance of risk and returns.\u00a0 If one wants to use the data for Opportunities Fund, the appropriate mutual fund category would be multi-cap funds.\u00a0 To bias for ULIPs, we can check that among the ULIP large cap funds, HDFC Life’s fund indeed has the best 5 year performance. <\/span><\/p>\n

Mutual Fund choice<\/span><\/h2>\n

Since we have picked a large cap fund from the ULIP space, we would look at the large cap category.\u00a0 A quick selection in VRO gives us the following list.\u00a0 You can easily see that\u00a0 many of the well performing mutual funds easily outperform the ULIP funds, based on published returns.
\n<\/span><\/p>\n

Open-ended – Equity: Large Cap – Return Five Year – Top 10 <\/span><\/h1>\n
<\/form>\n
\n
\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Fund<\/span><\/th>\nRating<\/span><\/th>\nCategory<\/span><\/th>\nLaunch<\/span><\/th>\nExpense <\/span>
\nRatio (%)<\/span><\/th>\n		5-Year <\/span>
\nReturn (%)<\/span><\/th>\n		5-Year <\/span>
\nRank<\/span><\/th>\n		Net Assets (Cr)<\/span><\/th>\n<\/tr>\n<\/thead>\n
Reliance ETF Junior BeES<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Feb-2003<\/span><\/td>\n0.23<\/span><\/td>\n20.35<\/span><\/td>\n1\/62<\/span><\/td>\n542<\/span><\/td>\n<\/tr>\n
JM Core 11 Fund<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Mar-2008<\/span><\/td>\n–<\/span><\/td>\n20.24<\/span><\/td>\n2\/62<\/span><\/td>\n36<\/span><\/td>\n<\/tr>\n
Reliance Large Cap Fund<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Aug-2007<\/span><\/td>\n2.30<\/span><\/td>\n20.09<\/span><\/td>\n3\/62<\/span><\/td>\n11,601<\/span><\/td>\n<\/tr>\n
ICICI Prudential Nifty Next 50 Index Fund<\/a> \u00a0|\u00a0 Invest Now<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Jun-2010<\/span><\/td>\n0.85<\/span><\/td>\n19.83<\/span><\/td>\n4\/62<\/span><\/td>\n300<\/span><\/td>\n<\/tr>\n
IDBI Nifty Junior Index Fund<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Sep-2010<\/span><\/td>\n1.74<\/span><\/td>\n18.83<\/span><\/td>\n5\/62<\/span><\/td>\n53<\/span><\/td>\n<\/tr>\n
SBI Bluechip Fund<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Feb-2006<\/span><\/td>\n2.35<\/span><\/td>\n18.10<\/span><\/td>\n6\/62<\/span><\/td>\n20,702<\/span><\/td>\n<\/tr>\n
HDFC Top 100 Fund<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Sep-1996<\/span><\/td>\n2.02<\/span><\/td>\n17.49<\/span><\/td>\n7\/62<\/span><\/td>\n15,874<\/span><\/td>\n<\/tr>\n
Aditya Birla Sun Life Focused Equity Fund<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
Oct-2005<\/span><\/td>\n2.36<\/span><\/td>\n17.42<\/span><\/td>\n8\/62<\/span><\/td>\n4,263<\/span><\/td>\n<\/tr>\n
ICICI Prudential Bluechip Fund<\/a> \u00a0|\u00a0 Invest Now<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
May-2008<\/span><\/td>\n2.08<\/span><\/td>\n17.17<\/span><\/td>\n9\/62<\/span><\/td>\n19,836<\/span><\/td>\n<\/tr>\n
Motilal Oswal Focused 25 Fund – Regular Plan<\/a> \u00a0|\u00a0 Invest Online<\/a> <\/span><\/td>\n<\/span><\/td>\n\n
EQ-LC<\/a><\/span><\/div>\n<\/td>\n
May-2013<\/span><\/td>\n2.38<\/span><\/td>\n17.10<\/span><\/td>\n10\/62<\/span><\/td>\n1,171<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n
Sourece: Value Research Online<\/span><\/div>\n
\n
\n
\n
To bias the comparison in favour of ULIPs, we would not pick the top funds.\u00a0 Since we picked HDFC Life among ULIPs, let us pick HDFC Top 100 among the mutual funds. <\/span>By default, VRO lists the regular plans.\u00a0 The 5 year return of\u00a0 the direct plan of HDFC fund is 18.3%<\/span><\/div>\n<\/div>\n<\/div>\n<\/div>\n

Comparison of Net Returns<\/span><\/h2>\n

With the information that we have collected so far, we look at the returns from the two scenarios.\u00a0\u00a0 Since mutual funds have more flexibility and better overall returns, we have assumed a difference of 1.5% in the returns compared to ULIPs. <\/span><\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n\n
Comparison<\/b><\/span><\/td>\nULIP<\/b><\/span><\/td>\nMutual Fund<\/b><\/span><\/td>\n<\/tr>\n
Provider<\/span><\/td>\nHDFC Life<\/span><\/td>\nHDFC AMC<\/span><\/td>\n<\/tr>\n
Plan Name<\/span><\/td>\nHDFC Life BlueChip Fund<\/span><\/td>\nHDFC Top100 Direct<\/span><\/td>\n<\/tr>\n
Investment amount<\/span><\/p>\n

(15,000 per month)<\/span><\/td>\n

1.8 lac per year<\/span><\/td>\n1.8 lac per year<\/span><\/td>\n<\/tr>\n
Investment period<\/span><\/td>\n20 years<\/span><\/td>\n20 years<\/span><\/td>\n<\/tr>\n
Assumed XIRR<\/span><\/td>\n12%<\/span><\/td>\n13.5%<\/span><\/td>\n<\/tr>\n
Total invested amount<\/span><\/td>\n36 lacs<\/span><\/td>\n36 lacs<\/span><\/td>\n<\/tr>\n
Corpus after 20 years<\/b><\/span><\/td>\n75.15<\/b> lac<\/b><\/span><\/td>\n85.99 lac<\/b><\/span><\/td>\n<\/tr>\n
Taxes<\/b><\/span><\/td>\n0<\/b><\/span><\/td>\n4.99 lac <\/b><\/span><\/td>\n<\/tr>\n
Net corpus after tax<\/b><\/span><\/td>\n75.15<\/b><\/span><\/td>\n80.99<\/b><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n
It is clear that the mutual fund gives a larger corpus, even after taxes. In fact the difference is positive even if the difference in the two CAGRs is only 0.75.\u00a0 Continuing to err on the side of ULIPs, we have also ignored the fact that LTCG applies only to gains more than 1 lac in any year. Most investors would chose to book these capital gains every year.\u00a0 With that assumption, the corpus for equity fund would be higher by another 1.8 lacs.<\/span><\/div>\n

Wait, what about 80(c) savings<\/span><\/h2>\n

It is true that the entire amount of Rs 16000 has tax deductions in the case of ULIPs. For the second scenario, only the term insurance premium of Rs 1,000 is tax exempt. One can always choose ELSS funds tax deductions. Also, most investors have enough ways to fill up the 80(c) limit without having to buy a high cost product like ULIP. (Please see this article<\/a> for a partial list.)\u00a0 <\/span><\/p>\n

For other supposed advantages of ULIPs over mutual funds, you can read this article: Do not buy ULIPs because equity mutual fund LTCG will be taxed!<\/a>\u00a0\u00a0 <\/span><\/p>\n

Conclusion<\/span><\/h2>\n

In this comparison, we loaded the odds in favour of ULIPs.\u00a0 The only advantage provided to mutual funds was the assumption of higher returns. In spite of the unfavourable odds, we see that mutual funds can be expected to give a higher corpus even after accounting for taxes.\u00a0 So continue to say a big NO to ULIPs. <\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Unit Linked Insurance Plans (ULIPs) have always been aggressively positioned in India.\u00a0 The recent (re)introduction of Long Term Capital Gains (LTCG) Tax on equity has added another dimension to the promotion of ULIPs. In this illustrative post, we look at Read More<\/a><\/p>\n","protected":false},"author":4,"featured_media":491,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_themeisle_gutenberg_block_has_review":false,"footnotes":""},"categories":[5,6],"tags":[45,44],"class_list":["post-229","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ins","category-mf","tag-ltcg","tag-ulip"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/229","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/comments?post=229"}],"version-history":[{"count":7,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/229\/revisions"}],"predecessor-version":[{"id":671,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/posts\/229\/revisions\/671"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/media\/491"}],"wp:attachment":[{"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/media?parent=229"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/categories?post=229"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/srinivesh.in\/blog\/wp-json\/wp\/v2\/tags?post=229"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}