I have started investing 6,00,000 per year for a 5 year period in SBI Smart Privilege Plan which is a ULIP plan. First year investment is completed.There is a locking period of 5 years which I am fine with. I have heard that MF is better than...

I have started investing 6,00,000 per year for a 5 year period in SBI Smart Privilege Plan which is a ULIP plan. First year investment is completed.There is a locking period of 5 years which I am fine with. I have heard that MF is better than ULIPs. But shouldn't we consider the fact that (considering we get 14-15% return) ULIPs maturity amount is tax free as against the MF's? Wouldn't this make the gains almost same for both ULIPs abd MFs at the end of 5 year period?

Ans: We would like to differ and suggest you not to mix insurance with investments. Also, since you're investing Rs. 6 lac per year, your ULIPs will be taxable. Generally ULIPs tend to give 6-9% kind of return, and MFs can give 14-16% kind of return as your rightly mentioned. Therefore, the difference in returns can be massive. Keeping things simple helps!

Ans: You have a Unit Linked Insurance Plan (ULIP) with SBI Life - Smart Privilege LP, which you started in 2017. You paid Rs. 6 lakhs annually for five years, totaling Rs. 30 lakhs. The current value of your policy is Rs. 72 lakhs. Your allocation is 70% in Midcap, 5% in Balanced Fund, 20% in Equity Growth Fund, and 5% in Top 300 Fund.

You aim to receive Rs. 75,000 monthly. Let's explore whether it's better to continue with the ULIP or switch to Mutual Funds with a Systematic Withdrawal Plan (SWP).

Performance and Structure of ULIPs
ULIPs combine insurance and investment. Your policy has done well, growing from Rs. 30 lakhs to Rs. 72 lakhs. This growth indicates a good performance. ULIPs offer life cover, which provides financial security to your family in case of your untimely demise.

The charges in ULIPs include premium allocation, fund management, mortality, and policy administration. These charges can impact returns over the long term. Despite these charges, your policy has performed admirably.

Evaluating Mutual Funds with SWP
Mutual Funds are solely investment products, without an insurance component. They typically have lower charges compared to ULIPs. Actively managed Mutual Funds allow flexibility and can be tailored to meet your risk profile and investment goals.

A Systematic Withdrawal Plan (SWP) allows you to withdraw a fixed amount regularly from your Mutual Fund investment. This can provide a steady monthly income. With an SWP, you can plan for Rs. 75,000 monthly withdrawals.

Risk and Return Assessment
You mentioned that you are not worried about risk. Both ULIPs and Mutual Funds can be tailored to match your risk appetite. In your ULIP, 70% is in Midcap, which is high-risk but high-reward. A similar allocation in Mutual Funds can potentially yield better returns due to lower costs.

Mutual Funds provide diversification and professional management. You can choose a mix of Equity, Balanced, and Debt funds to match your risk profile. With the right selection, Mutual Funds can outperform ULIPs over the long term.

Tax Implications
ULIPs have a tax advantage under Section 80C for premiums paid and Section 10(10D) for maturity proceeds. Mutual Funds also offer tax benefits, particularly Equity Linked Savings Schemes (ELSS) under Section 80C.

However, the tax treatment on withdrawals differs. Withdrawals from Mutual Funds are subject to capital gains tax. Long-term capital gains (LTCG) on equity funds are taxed at 10% above Rs. 1 lakh. Short-term capital gains (STCG) are taxed at 15%.

For debt funds, LTCG is taxed at 20% with indexation, and STCG is taxed as per your income slab. It's essential to consider these tax implications when planning your SWP.

Costs and Charges
ULIPs have higher costs due to the insurance component and various charges. These charges can eat into your returns over time. Mutual Funds have lower costs, primarily the expense ratio. By investing through a Certified Financial Planner (CFP), you can benefit from professional advice and potentially better fund selection.

Direct Mutual Funds have lower expense ratios than regular plans. However, investing through a CFP can provide personalized advice, which can enhance your returns and help in achieving your financial goals.

Liquidity and Flexibility
Mutual Funds offer better liquidity compared to ULIPs. You can redeem your Mutual Fund units partially or fully at any time. ULIPs have a lock-in period, typically five years, limiting liquidity.

The flexibility in Mutual Funds allows you to switch between funds without charges, unlike ULIPs which may have switching charges. This flexibility can help you adapt your portfolio to changing market conditions and personal circumstances.

Benefits of Staying with ULIP
Your ULIP has performed well, doubling in value. Continuing with the ULIP can provide continued life cover and potential tax benefits. If you value the insurance component and the current performance, staying invested might be beneficial.

However, consider reviewing the fund performance periodically and reassess the charges. If the charges start to outweigh the benefits, it might be time to consider switching.

Transitioning to Mutual Funds
Switching to Mutual Funds with an SWP can provide a steady income and potentially higher returns due to lower costs. Here's how you can proceed:

Evaluate Your Goals: Ensure that Rs. 75,000 monthly is realistic based on your corpus and expected returns.
Select Funds Carefully: Choose a mix of equity, balanced, and debt funds to match your risk profile.
Plan Withdrawals: Set up an SWP to provide the desired monthly income. Review and adjust periodically.
Consult a CFP: A Certified Financial Planner can help optimize your portfolio and ensure it aligns with your goals.
Transition Strategy
If you decide to switch, do it gradually to avoid market timing risks. Redeem your ULIP in phases and invest in Mutual Funds systematically. This strategy can help mitigate market volatility.

Ensure that your new investments are diversified. A mix of large-cap, mid-cap, and debt funds can provide stability and growth. Regularly review and rebalance your portfolio to stay aligned with your goals.

Final Insights
Your ULIP has done well, and it offers insurance cover and tax benefits. However, the high charges can impact long-term returns. Mutual Funds with an SWP offer flexibility, potentially higher returns, and lower costs.

Evaluate your goals, risk profile, and tax implications carefully. Consult a Certified Financial Planner to help make an informed decision. A gradual transition to Mutual Funds can provide the desired monthly income and better long-term growth.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in