Strange Question!
If you guessed No for the above question, you are not wrong most of the times. But then things change with time. And so do some answers.
Refer to my earlier post about ICICI Prudential Ace ULIP and probably you may know what I am talking about. Yes this is the latest launch from ICICI prudential and it has potential to beat equity mutual fund/ Tax Saving (ELSS) return in the long run.
My method of comparison
Comparing ULIP with Mutual Fund is like comparing oranges & apples, but then agents here are selling both of them as fruits (or investment opportunities).
For my comparison there are a few things that need to be understood.
First – ULIPs as a product provide both insurance & investment. The returns of ULIPs are based on the underlying fund you invest in – which may be a diversified, sectoral, index, balanced or debt fund.
The second assumption is the underlying fund in ULIPs can give a gross return as good as its respective Mutual Fund. So the only thing that would differentiate your returns is the respective expenses.
So for my comparison I would take any Tax saving Mutual Fund (ELSS) and assumes that for ICICI Ace – I would have chosen its Multi Cap Growth Fund. Both of these would invest 80-100% in equity and 0-20% in debt. So I assume that the gross returns from both the funds would be same.
The reason for comparing ULIP with ELSS is because most of the investment in ULIP is done for tax saving.
Investment made: Rs 30,000 per annum
Age: 28 years
Tenure of Policy: 30 Years
ICICI Multi Cap Growth Fund FMC: 1.35%
ELSS FMC: 2%
Service Tax on FMC: 10.3%
*FMC - Fund Management Charges
Assuming gross yield of both the funds @ 10%, this is how the mathematics works out.
If you are reading in feed the xls table may not be visible. Please visit the blog to see it.
We can assume the surrender value of ICICI Ace as its return in respective years. So we see that after 6 years Ace starts to outperform ELSS. And at the end of 30 years the Ace outperforms ULIP by 27% which is huge.
Some observations:
As the premium amount increases ULIP tends to further outperform ELSS because ULIP charges are fixed + Variable while for ELSS it’s always percentage of Fund value.
ELSS expense can vary from 1.5% to 2.5%, with majority of ELSS having expense of 2.5%. In the above case if we assume 2.5% expense for ELSS, by the end of 30 years ULIP returns are 42% more than ELSS.
You can change the Annual Premium, gross yield; Fund Management charges yourself in the above sheet and see how it affects the returns in different cases.
Conclusion:
To conclude if you want to remain invested for long term (more than 6 years) then investing in ICICI Ace may turn out to be a better option than investing in ELSS (Tax Saving) Mutual Fund. The additional benefit of 5 times life insurance on annual premium seems to be the icing on the cake. But like any other ULIP this may not be able to cover your life insurance. For that you should always look to Term Plans. Click here to see a comparison of Term Life Insurance Plans.
The only caveat here being that ICICI Ace funds don’t have a long track record, which means nothing can be said about the quality of fund management and the kind of returns the fund would generate.
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