You must be knowing that life is full of alternatives and choices. When you visit that mobile store to make your new smart phone purchase the salesman brings you two smart phones strikingly similar in all features except in the color asking you to make a choice. Many a time you find this choice to be one of the hardest ones you have ever made. I would like to bring to your attention a famous quote " Life Is Full Of Hard Choices. All You Can Do Is Choose A Path And Walk Ahead ". You must have heard about the " Opportunity Cost Of Capital ". This is a concept of alternative investment decisions where you have to choose between several different set of alternatives and make the best possible investment decision among the choices available to further your economic goals. Find This Difficult? Do Not Fret. The team of Financial Planners at IndianMoney.com are always there for you to plan your investment needs in a most effective and efficient manner. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111.
You must have heard of the word twin benefits or the two in one option. A unit linked insurance plan is basically an insurance policy bundled with an investment component. It incorporates the benefits of both insurance as well as investment. Based on the investors risk appetite, premium paying capacity, age and financial goals he can fix the portfolio of that unit linked insurance policy.
You must have heard of the phrase "Unity Is Strength". Similarly a mutual fund is a collective pool of investment where the underlying instrument is a package of stocks. You know that the price of shares has skyrocketed and it might not be possible for a single investor to obtain significant quantities of such pricey stocks. By investing in a mutual fund you are actually purchasing fractions of shares and you can own shares of several large companies by making small investments. These mutual funds might invest in debt, equity, shares of a particular sector or in money market instruments. Depending upon your risk appetite you can choose your mutual fund portfolio.
You must have heard of the famous phrase comparing chalk and cheese. While both mutual funds and unit linked insurance plans have their pros and cons I will make an attempt to compare the two of them to arrive at some sort of conclusion.
You must be knowing that the unit linked insurance plan has a premium allocation charge which might be as high as 8% of the premiums paid. These policies charge mortality cover charges and fund management charges which even though are just 1.35% they are levied on the accumulated fund value and not on the premium. In addition we have policy and administration charges as well as surrender charges which make charges on a unit linked insurance plan quite an expensive affair. Compare this with a mutual fund and you find the entry load has been scrapped .Moreover the mutual fund also has the direct plan option which takes the intermediaries out of the game. As far as cost comparison goes mutual funds win hands down against the unit linked insurance plan.
Let us consider a Unit Linked Insurance plan scheme of a famous insurance agency in India in which one can fix ones premium in the range from INR 25000-INR 100000.Mr Uday a 30 year old male has taken up this policy for a period of 10 years paying a premium of INR 50000 per annum. The sum assured is INR 10 Lakhs. The premium allocation charge is 3% of the annual premium of the first year with no charge thereafter. This translates to a cost of INR 1500.This policy charges an administration charge of 6% for the first 5 years of the policy. This translates to INR 15000 for a period of 5 years. The administration charges taper to 3% for the remaining 5 years This translates to INR 7500 for the next 5 years. If you add up the costs you will find that out of a premium paid of 5 Lakhs the charges are nearly INR 25000.The fund management charges are 1.35% of the fund value. This translates to quite a high cost when compared to costs involved in a mutual fund.
Let us consider Mr Suresh a male 30 years of age has taken a ULIP Plan and pays a premium of INR 1 Lakh per annum for a period of 15 years .This ULIP Plan has various charges that are deducted from the premium such as Premium Allocation Charges of 3% in the first year which is nil in the subsequent years. The Policy administration charges are INR 5000 for the first 5 years and INR 3000 for the subsequent 10 years. The Fund Management charges are 1.35% on fund value after charging policy administration charges and premium allocation charges.The mortality charges are INR 2500 per annum with a decrement of INR 100 per year for 5 years. It reduces to nil in the subsequent years. The sum assured is INR 15 Lakhs.
Let us consider Mr Ritesh a male 30 years of age invests INR 1 Lakh per annum in an Equity Mutual fund for a period of 15 years. He takes a term insurance policy with a sum assured of 15 Lakhs paying a yearly premium of INR 2500.This is necessary as mutual funds do not have an insurance component. The charges in the mutual fund are 2% of the Opening Balance. The rate of return on the mutual fund is 10% compounded annually. Growth Rate minus the mortality premium and charges gives us the closing balance. We then add the 1 Lakh investment amount to get the opening balance.
Table Showing The Calculations Of Returns In A Mutual Fund :
Findings Of This Study :
I would like to end this article with the famous quote " In Life Change And Choice Is A Constant ". Whenever alternatives are available you will have to make a choice .In investment these choices translate into huge profits or losses. You hold the key to your financial future in your own hands. So make the right choices and enjoy the fruits of your labor.
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