Is Unit linked insurance better than mutual fund?

Unit linked insurance:
Most insurers in the year 2004 have started offering at least a few unit-linked plans. Unit-linked life insurance products are those where the benefits are expressed in terms of number of units and unit price. They can be viewed as a combination of insurance and mutual funds.

The number of units that a customer would get would depend on the unit price when he pays his premium. The daily unit price is based on the market value of the underlying assets (equities, bonds, government securities, et cetera) and computed from the net asset value.

The advantage of unit-linked plans is that they are simple, clear, and easy to understand. Being transparent the policyholder gets the entire upside on the performance of his fund. Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient utilisation of capital.

Unit-linked products are exempted from tax and they provide life insurance. Investors welcome these products as they provide capital appreciation even as the yields on government securities have fallen below 6 per cent, which has made the insurers slash payouts.

According to the IRDA, a company offering unit-linked plans must give the investor an option to choose among debt, balanced and equity funds. If you opt for a unit-linked endowment policy, you can choose to invest your premiums in debt, balanced or equity plans.

If you choose a debt plan, the majority of your premiums will get invested in debt securities like gilts and bonds. If you choose equity, then a major portion of your premiums will be invested in the equity market. The plan you choose would depend on your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is especially so if one also believes that current market values (stock valuations) are relatively low.

So if you are opting for a plan that invests primarily in equity, the buzzing market could lead to windfall returns. However, should the buzz die down, investors could be left stung.

If one invests in a unit-linked pension plan early on, say when one is 25, one can afford to take the risk associated with equities, at least in the plan's initial stages. However, as one approaches retirement the quantum of returns should be subordinated to capital preservation. At this stage, investing in a plan that has an equity tilt may not be a good idea.

Considering that unit-linked plans are relatively new launches, their short history does not permit an assessment of how they will perform in different phases of the stock market. Even if one views insurance as a long-term commitment, investments based on performance over such a short time span may not be appropriate.


Mutual Funds:
The recent developments pertaining to SBI Mutual Fund and its investment, on a preferential basis, in a technology company in early 2000 (just ahead of the tech meltdown) have been grabbing headlines.

In this note, we do not offer our view on whether the investment decision was justified or not. We instead look into what one can possibly take away from such a situation.

The Regulator

Indeed, the Securities and Exchange Board of India has, justifiably in our view, come down heavily on the mutual fund industry in recent months. The incessant launch of open-ended schemes by asset management companies, which were nothing but the result of a compulsion of distribution, was one of the most unethical practices in the industry.

Sebi has put an end to it by changing regulations pertaining to charging of expenditure during the launch of such schemes to the scheme itself (from amortisation over five years, to within the first year of launch). The result is for all to see - no more new fund offers for open-ended schemes. Thank you, Sebi.

But there is a lot more to be done, before financial planners and research houses like us, develop a comfort with the way the mutual fund industry is shaping up. Even simple, basic data pertaining to schemes is not available in a standardised format. Take the following data points for example:

Portfolio turnover (tells you the churn in the portfolio)
The expense ratio
Both the above data points are very important for any mutual fund research analyst; but this is simply not available in a standardised format. Each AMC declares this information at different frequencies for different schemes; sometimes, locating this information in the fact sheet is as challenging as money management itself!

Our suggestion is that Sebi get all the AMCs to file their fact sheets, in a standardised format (which can also be downloaded), in one central location which can then be accessed by all - the research analyst, the distributor and the investor.

Making information available to all those interested in mutual funds will solve only part of the problem. The biggest problem today is, broadly speaking, a complete lack of understanding of mutual funds.

At Personalfn, we regularly present to groups of individuals across India on how they should plan their finances. The one learning we have from these presentations is that the knowledge level of the average investor is below par. And that is why the distributor and the AMC, leaving aside few of them, have taken advantage of the investor.

There is an urgent need for Sebi to 'educate' investors, as only few in the industry actually are involved in such activities; but of course all of them claim to do so. We are certain of one thing - conventional methods will not work. There is an urgent need to discuss ways of educating the millions of investors in the country.

Who will pay for this you say? Undoubtedly, the mutual funds and stock exchanges. Every trade executed on the stock exchange (where ultimately the equity mutual funds transact) effectively contributes to the investor protection fund. These funds need to be utilised for the purpose of educating investors.

An educated investor armed with credible information will be less susceptible to fall prey to every other 'transaction generating' gimmick the industry adopts.

The Distributor

The mutual fund distributor has undoubtedly been the biggest beneficiary of the recent stock market bull run. Commissions on 'pushing' open ended mutual fund NFOs (new fund offers) have been as high as 6 per cent, i.e. if an NFO mobilised Rs 5,700 crore (Rs 57 billion)) about Rs 340 crore (Rs 3.4 billion) got paid out as commission!

If this makes you wonder why Personalfn, which is a financial planner, does not have more than 8 branches as on date, the reason is not far to seek -- we give about 90% of NFOs a miss, even though they pay very attractive commissions. The reason is simple -- they are not in your interest.

By the way, we have never recommended a SBI Mutual Fund scheme to our clients (some have invested, as we reckon, the pull was too great to be subdued by our apparently rational view).

The distributor will have to migrate from 'selling schemes' to offering solutions that are in the interest of the investor. If that seems a difficult transition, the unscrupulous selling in any case must stop. Advice should be backed by research.

The Investor

As far as the investor is concerned, in our view, there are two options. One, read up and become a smart investor Two, alternatively you can spend that time on finding yourself an honest financial planner (even in this case, always question your financial planner on the advice; always be in control)

It is important that the investigation into the SBI Mutual Fund issue is completed in a time bound manner. The final verdict, if any, will have yet more learnings for the industry.

Having said that, we continue to believe that for most investors mutual funds continue to be preferred investment options.

Curtecy : Rediff news

If you are looking for returns, then ULIP does not offer as good returns as Mutual Funds do. This is because a large part of ULIP contribution goes to administrative expenses. On the flip side, ULIP offers Life insurance cover, which MFs don't offer. If you are not particularly interested in Life cover, then don't go for ULIP. If you want life cover with good returns, best bet would be (particularly if you are young, say below 30) to take a Pure Term Assurance cover and invest in Mutual Fund.

It depends on you dear.If you wish to cover your Life and have a moderate Income then go for ULIP or else go for Mutual Fund schemes which will give you good return of your Money and Yield on Investment.However please do not Invest in UTI mutual Fund as we Indian people had very bad experience about them.They swallowed my money which I invested in Master Shares and In children Growth Fund and I get nothing out of it.

Ya because it covers your life insurance .