WHY DO I WANT YOU TO INVEST IN ULIP RATHER THAN MUTUAL FUND, PPF, FIXED DEPOSIT??

Everyone loves to invest their money where the returns are maximum and risk is minimum. But risk and returns go hand in hand be it business or stock market. No I am not saying invest all your money in high risk asset class in expectation of higher returns, but to have moderate exposure in all asset class and have a balanced portfolio.

So the youth of this country is highly attracted towards stock market thanks to attractive returns shown by derivative traders and a hunt for multibagger stocks in social media platforms. Everyone has now started an SIP of about Rs10,000 -20,0000 per month in different funds based on past performances, thumbs up for that but have you planned the maturity proceeds of these funds and its taxation effect?? If not don’t worry we will cover this in our article as well. The fact check about the returns generated by investment is stock market ie equity investment is mere 13-14 % P.a. CAGR for last 25 years.

Have a thought and ask yourselves  how many of you consider 13-14% p.a. return on investments as good returns??

Now coming to our topic, we are comparing four different products and all of you must be familiar with these names. The different properties of these products are classified in tabular format:-

PRODUCT	RETURN %	LOCK IN	GUARANTEED	TAXABILITY
FIXED DEPOSIT	5%	NO	YES	TAXABLE
PPF	7%	15 YEARS	YES	EXEMPT
ELSS MUTUAL FUNDS	14%	3 YEARS	NO	TAXABLE
ULIP	14%	5 YEARS	NO	EXEMPT

 

On returns part fixed deposits and PPF doesn’t stand at all, since it doesn’t even cover the inflation forget about wealth creation in long term. Considering lockin period in PPF and taxability of interest received on fixed deposit, these investments option doesn’t seems to be attractive at all.

So now we have two options left one is Mutual Fund and another is ULIP. As you all are having a good exposure in mutual fund, I need not have to explain in detail the risk associated with it. So long story short the funds you give to fund managers they invest in stock market, buy and sell shares of the companies and returns your money with profit. Now, as it is not guaranteed, all of us know that since last 25 years equity market has given 14% return and  we are assuming in next 10-25 years Indian economy will grow and we will get our expected returns of 14% P.a. in future as well.

WHY ULIP, WHY NOT MUTUAL FUND??

So, the concept of mutual fund and ulip is pretty much same, the money you invest is invested in equity market through professional fund managers who keeps a watch on funds on daily basis and gives you desired returns. However there are two major differences which stand apart ULIP from mutual funds.

1.  No income tax on sale of ULIP, ie whole maturity proceeds are tax free, where as on selling of mutual funds you have to pay 10% income tax above Rs 1,00,000 gains.

2.  Insurance cover of 10 times of initial investment.

(if you invest Rs 2,40,000 P.a. from next day you have a life cover of Rs 24,00,000)

 

 

 

 

The tabular comparison of both investment options is produced before for your reference:-

ULIP
year	INVESTMENT		MARKET VALUE		WITHDRAWL AVAILABLE
1	2,40,000.00		2,73,600.00
2	2,40,000.00		5,85,504.00
3	2,40,000.00		9,41,074.56
4	2,40,000.00		13,46,425.00
5	2,40,000.00		18,08,524.50		18,08,524.50
6	2,40,000.00		23,35,317.93		23,35,317.93
7	2,40,000.00		29,35,862.44		29,35,862.44
8	2,40,000.00		36,20,483.18		36,20,483.18
9	2,40,000.00		44,00,950.82		44,00,950.82
10	2,40,000.00		52,90,683.94		52,90,683.94
11	2,40,000.00		63,04,979.69		63,04,979.69
12	2,40,000.00		74,61,276.85		74,61,276.85
13	2,40,000.00		87,79,455.61		87,79,455.61
14	2,40,000.00		1,02,82,179.39		1,02,82,179.39
15	2,40,000.00		1,19,95,284.51		1,19,95,284.51
	36,00,000.00		1,19,95,284.51		1,19,95,284.51
	PROFIT		83,95,284.51
	NET PROFIT		83,95,284.51
1	INSURANCE OF RS. 24,00,000/- FROM DAY 1.
2	LOAN UPTO 50% OF MARKET VALUE AFTER 3 YEARS.
3	DEDUCTION UNDER SECTION 80C, TAX SAVING OF RS 45,000.P.A
4	RECEIVE TAX FREE AMOUNT ON SELLING THE CORPUS.
MUTUAL FUND
year	INVESTMENT	MARKET VALUE		WITHDRAWL AVAILABLE
1	2,40,000.00	2,73,600.00
2	2,40,000.00	5,85,504.00
3	2,40,000.00	9,41,074.56		9,41,074.56
4	2,40,000.00	13,46,425.00		13,46,425.00
5	2,40,000.00	18,08,524.50		18,08,524.50
6	2,40,000.00	23,35,317.93		23,35,317.93
7	2,40,000.00	29,35,862.44		29,35,862.44
8	2,40,000.00	36,20,483.18		36,20,483.18
9	2,40,000.00	44,00,950.82		44,00,950.82
10	2,40,000.00	52,90,683.94		52,90,683.94
11	2,40,000.00	63,04,979.69		63,04,979.69
12	2,40,000.00	74,61,276.85		74,61,276.85
13	2,40,000.00	87,79,455.61		87,79,455.61
14	2,40,000.00	1,02,82,179.39		1,02,82,179.39
15	2,40,000.00	1,19,95,284.51		1,19,95,284.51
	36,00,000.00	1,19,95,284.51		1,19,95,284.51
	PROFIT	83,95,284.51
	TAX @10% ON MATURITY =8,39,528/-(ie 10% on profit)
	NET PROFIT	75,55,756.51

So above table clearly shows that taking a wise decision of investing in ULIP instead of Mutual Fund can save tax worth Rs 8,39,528 that too with insurance benefit of Rs 24,00,000/-.

Because of above mentioned benefits, I find investment in ulip far more superior  as compared to mutual fund.

Ever imagined why is ULIP tax free and a 10% tax on Mutual funds??

Let me take you to the reasons behind why government is not imposing tax on ULIPS. The government of India wants the people of India specially working class to be insured and also have their money parked in equity market through professional fund managers. ULIP serves both this purpose and thus makes perfect product to be eligible for exemption.

 

THE HIGH NETWORTH INDIVIDUAL (HNI) PART

ULIP being a tax free product, many HNI and NRI people invested heavily in it and gained profits without paying any taxes on it.

Here is the example for the same:

Suppose a HNI has invested Rs 50 lacs yearly in ulip for 5 years his total investment comes out to Rs 2.5 crore. Now after 5 years if the market value is Rs 4 crore, the gain of Rs. 1.5 crore is totally tax free. Thus saving tax worth 15 lacs ie 10% of 1.5 crore if invested in mutual fund.(since both ULIP and mutual fund invest in equity market). ULIP is Unit Linked Insurance Product.

Government after recognizing the modus operandi of HNI and NRI has now capped the maximum limit of Rs2,50,000/- per anum to be eligible for tax exemption so that only working class people can take this advantage and HNI, NRI people should pay taxes on their profits. The limit of Rs 250000 is applicable after the finance act 2021 comes into effect. If a person invest more than Rs 2,50,000 in ULIP in a year than maturity proceeds become taxable as in case of mutual funds.

 

Charges and features:-

1.  There are fund management charges, mortality charges, premium allocation charges levied in every ULIP policy.

2.  The returns of 14% p.a  are after deducting all the above charges. Over the period of last 5 years one of my client has generated a CAGR of 22% p.a. that too tax free with insurance cover.

3.  There has been a lot of misselling in the name of ULIP upto 2012 after that several regulatory compliances have been made compulsory by IRDA thus making whole process transparent now.

4.  Again a lot is dependent on your financial advisor which product he recommends you based on your needs amongst variety of options available.

5.  There are loyalty bonus and fund booster available if you stay invested for 15,20,25, 30 years, Upto 100% of your initial investment.

 

My recommendations and target audience:-

 

1.  If you have a corpus of  Rs. 10-20 lacs in mutual fund and fixed deposits as on today, start withdrawing funds amounting Rs 2,40,000 per year from there and start investing in ULIP.

Withdrawing funds from low return generating products and investing in higher return generating products is also a WISE investment decision.

 

2.  If you are  a salaried individual having salary upto 10 lacs per year , start investing in ULIP instead of mutual funds.

3.  If you are a business man having monthly income of 1 lac to 2 lac plan your future and create a retirement corpus for your future by investing in ulip.

4.  Let your money work for you from early stage, rather than only working for money.

 #Think Twice, Act Wise# Growth is permanent, Setbacks are temporary.

Study Material :-

https://www.timesnownews.com/business-economy/personal-finance/insurance-faq-how-to-build-a-retirement-corpus-using-ulips-article-92456475

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 DISCLAIMER:-

Mutual Fund and ULIP investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds and ULIP is not necessarily indicative of future performance of the schemes. The Mutual Fund and ULIP is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.

Disclaimer :- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.