Posts Tagged ‘net asset value’

Let’s Talk About Mutual Funds ;)

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Friends we will discuss now as to what are mutual funds before going on to seeing why to invest in mutual funds instead of stock ๐Ÿ™‚

What is a Mutual Fund?

A mutual fund is an investment that pools money from many investors, and that money is used to invest in stocks, bonds and other securities.

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One mutual fund share includes a portion of a share of each stock held in the fundโ€™s portfolio.

The stocks these mutual funds have are very fluid and are used for buying or redeeming and/or selling shares at a net asset value.

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Mutual funds posses shares of several companies and receive dividends in lieu of them and the earnings are distributed among the share holders.

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Who Decides What a Mutual Fund Invests In?

Mutual fund managers decide what securities to buy or sell guided by the mutual fundโ€™s objectives.

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If a mutual fundโ€™s objective is to invest in the energy sector, the manager cannot buy shares in technology stocks.

Fund objectives let you know what to expect now and in the future.

Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern.

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An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund.

Closed end funds have limited number of shares.

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Why Invest in Mutual Funds Instead of Stock?

You can invest in both mutual funds and individual stocks, but mutual funds are particularly useful in some cases.

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*Diversification: If you do not have a lot of money to invest, creating your own diversified portfolio to spread risk will be difficult.

Diversification is automatic in mutual funds.

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*Time : Successful investors take hours every week to analyze their holdings, stock market conditions and to educate themselves further on investing.

Mutual funds are a wise choice for those who lack the time to follow stocks so closely.

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* Experience: Consistently investing well takes a few years of experience and learning from mistakes and successes.
If you are not experienced with trading stocks but want returns over and above what a savings account offers, investing in mutual funds is a good way to grow your personal assets.

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Nifty Hit the Level of 5,000 :)

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Nifty hit the significant level of 5,000, first time since May 23, 2008, taking 326 trading sessions while, the standard index prepared early gains to close flat after hitting 5,003 at its dayโ€™s high.

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However, nifty closed slightly higher at 4,965, up 7 points whereas another standard Sensex also ended flat at 16,711, up 34 points, off its dayโ€™s high of 16,820 while both the indices were lower by over 4.4% decline in heavyweight RIL.

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Moreover, RIL stated that it has raised around Rs 3,188 crore through sale of 1.50 crore equity shares of the company and selling pressure in RIL weighed down on the oil & gas index, down 2.8%.

Additionally, the BSE realty index slid 0.9%, Unitech lost 3% and Phoenix Mills declined 2.4% while IT and auto stocks increased.

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Similarly, the BSE IT index gained 1.9%, Patni Computer and HCL Tech rose over 6% while the auto index on the BSE was also up 1.5% and Amtek Auto increased 14.6%.

On the other hand, in the Sensex pack, ACC emerged as the biggest gainer while the stock advanced 3.6% to Rs 827 however, Hindalco, JP Associates, Bharti Airtel and Maruti Suzuki gained over 3% each.

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Further, RIL was declared the top loser in the group followed by Tata Steel and ITC.

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A correction is expected and likely to take place in markets at current levels. But it is unlikely to be a sharp one.

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European and Asian stock markets extended the week’s rally on Thursday, hitting new highs for the year, as investors became increasingly confident that the U.S. economy , the world’s largest , is growing again.

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Are There Any Advantages of Systematic Investment In ULIPs ??

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The impact of economic recession on life insurance companies has gone unnoticed where not only premium incomes but also the employment potential of many companies has decreased.

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However, the global slowdown and resulting unpredictable stock indices have shaken public confidence in long-term financial planning and there is visible unwillingness to purchase an insurance policy and commit oneself to pay premiums regularly over a number of years.

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Moreover, the Sensex, over the last 25 years, suffered massive crashes in 1992-93, 2000-01 and 2008-09 at eight year intervals.

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However, there was no impact on the life insurance industry on earlier occasions, when the index crashed whereas till the opening of the insurance sector, the Life Insurance Corporation was marketing traditional products, considered symbols of stability and security, immune to the vagaries of the stock market.

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Moreover, the new companies that came on the scene, trying to capitalize on the stock market boom, began marketing unit linked products, ignoring traditional products.

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However, although the Sensex had crashed three times, it had advanced from just 245 in March 1984 to 9700 in March 2009, an annual growth of 16% while stock market indices tend to increase steadily under the influence of economic growth and inflation.

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Nevertheless, under the impact of speculative forces, the growth can be uneven while investors can minimize, if not eliminate, the impact of speculative forces through systematic investment in ULIPs or mutual funds.

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Moreover, under a unit linked plan, the premiums are invested in equities and the value of the units on any day moves broadly in line with the stock index on that day.

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Suppose a person had taken out a ten year policy on March 31, 1984 and paid Rs. 1,000 every year.
Ignoring all charges and the dividend income from investments, what is the gross yield he can expect by March 1994?

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Based on the changes in Sensex, the average yield will be 17.8 per cent. ๐Ÿ™‚

If the date of commencement had been March 1985 or 1986 โ€ฆ or 1999, the yield to maturity at the end of ten years would have varied between 4.8 per cent and 30.3 per cent.

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And in four of the 16 cases the yield would have been negative.

The range of variation is quite wide and the chance of negative yield is 4 out of 16, or 25 per cent.

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The range will narrow down and chances of negative yield come down with increasing policy terms.

The results will be still better with quarterly or monthly modes of premium payments.

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This means that an investor in ULIPs should opt for a minimum term of 15 years and, preferably, a quarterly mode of payment.

And, having chosen a plan, he should select a fund with more than 50 per cent equity content.

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Even if the market takes a sudden plunge after the policy is taken, be not panic and allow the policy to lapse.

One should pay the next premium in time.

With a lower net asset value, he can get more units for the same premium.

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Market setbacks at the earlier stages of a policy will not significantly affect the yield to maturity.

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But any setback in the last few years before maturity can reduce it considerably.

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It is therefore advised that the policy holder should start keeping a close watch on the NAV of the relevant fund and the market indices.

If there are indications of a downtrend, he should surrender the policy and take out the cash value.

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By following the above steps one can insulate oneself, though not fully, from market fluctuations and hope to get a better return than what one can get from a traditional product.

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A lucky few may even get a very high return while the unlucky ones may end up with very low or even negative returns.

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Suppose a person had taken out a ten year policy on March 31, 1984 and paid Rs. 1,000 every year.

Ignoring all charges and the dividend income from investments, what is the gross yield he can expect by March 1994?

Based on the changes in Sensex, the average yield will be 17.8 per cent.

If the date of commencement had been March 1985 or 1986 โ€ฆ or 1999, the yield to maturity at the end of ten years would have varied between 4.8 per cent and 30.3 per cent.

And in four of the 16 cases the yield would have been negative.

The range of variation is quite wide and the chance of negative yield is 4 out of 16, or 25 per cent.

The range will narrow down and chances of negative yield come down with increasing policy terms.

The results will be still better with quarterly or monthly modes of premium payments.

If dividend incomes from investments and the fact that fund managers invariably outperform the market index are also taken into account, the net yield after deduction of charges may exceed the gross yield.

This means that an investor in ULIPs should opt for a minimum term of 15 years and, preferably, a quarterly mode of payment.

And, having chosen a plan, he should select a fund with more than 50 per cent equity content.

Even if the market takes a sudden plunge after the policy is taken, be not panic and allow the policy to lapse. He should pay the next premium in time. With a lower net asset value, he can get more units for the same premium.

Market setbacks at the earlier stages of a policy will not significantly affect the yield to maturity. But any setback in the last few years before maturity can reduce it considerably.

It is therefore advised that the policy holder should start keeping a close watch on the NAV of the relevant fund and the market indices. If there are indications of a downtrend, he should surrender the policy and take out the cash value.

By following the above steps one can insulate oneself, though not fully, from market fluctuations and hope to get a better return than what one can get from a traditional product.

A lucky few may even get a very high return while the unlucky ones may end up with very low or even negative returns.

480 Funds Make it to the Sensex-Beater List :)

Sensex beater Funds

The net asset value (NAV) appreciation of nearly 480 funds or nearly one out of every two funds has bettered the sensex returns of 9% in the past year.

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Around 100 funds have at least doubled the 30-share indexโ€™s gains.

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Some like IDFC Small & Midcap Equity (43%), Tata Life Sciences & Tech (40%), UTI Transportation and Logistics (38%), Canara Robeco Equity Tax Saver (36%), Birla Sun Life Dividend Yield Plus (36%), ICICI Prudential Gilt Investment PF (35%) and Reliance NRI Equity (34%) returned eye-popping 3 times sensexโ€™s returns.

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Overall, there are at least 23 funds which more than tripled the benchmarkโ€™s gains in the period starting August 31โ€™08 and ending this August 30.

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Mutual funds have always showed the ability to beat popular benchmarks.

While investors remain cautious, especially after Sebi regulations on loads, the fact remains that most funds have good track records.

The industry have delivered always alpha (a measurement of risk-adjusted performance) as per the industry experts.

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Interestingly, many funds which sported NAVs of less than Rs 10 have proved to be real gems and may have helped SIP users.

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Take, for instance, Religare Contra fund.

The market rally has helped the same fundโ€™s NAV to almost touch Rs 13 per unit, gaining 32.52% in 12 months.

Other funds which have outperformed sensex include Taurus Infrastructure (29%), Mirae Asset India Opportunities (25%), AIG World Gold (20%), HSBC Tax Saver Equity (20%) and Morgan Stanley ACE fund (19%).

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Numerous exchange traded funds (ETFs), which track a specific index or commodity, find their place in the market beater list with those tracking gold like Gold Benchmark ETF (27%) or banks such as Kotak PSU Bank ETF (32%) doing exceedingly well.

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Monthly income plans, best suited for getting specified monthly payment to investors like senior citizens and retired persons, also make it to the sensex-beater list.

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Funds like Reliance MIP (28%), HDFC MIP Long-term (22%), Principal MIP Plus (14%), Templeton MIP-G (12%) and LIC Floater MIP (10%) are some examples.

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The net asset value (NAV) appreciation of nearly 480 funds or nearly one out of every two funds has bettered the sensex returns of 9% in the past year. Around 100 funds have at least doubled the 30-share indexโ€™s gains. Some like IDFC Small & Midcap Equity (43%), Tata Life Sciences & Tech (40%), UTI Transportation and Logistics (38%), Canara Robeco Equity Tax Saver (36%), Birla Sun Life Dividend Yield Plus (36%), ICICI Prudential Gilt Investment PF (35%) and Reliance NRI Equity (34%) returned eye-popping 3 times sensexโ€™s returns. Overall, there are at least 23 funds which more than tripled the benchmarkโ€™s gains in the period starting August 31โ€™08 and ending this August 30.

โ€œMutual funds have always showed the ability to beat popular benchmarks. While investors remain cautious, especially after Sebi regulations on loads, the fact remains that most funds have good track records. We (the industry) have delivered always alpha (a measurement of risk-adjusted performance),โ€™โ€™ said the CEO of a top mutual fund. Interestingly, many funds which sported NAVs of less than Rs 10 have proved to be real gems and may have helped SIP users. Take, for instance, Religare Contra fund which had an NAV of Rs 9.78 on August 30, 2008. The market rally has helped the same fundโ€™s NAV to almost touch Rs 13 per unit, gaining 32.52% in 12 months. Other โ€˜beaten-downโ€™ funds which have outperformed sensex include Taurus Infrastructure (29%), Mirae Asset India Opportunities (25%), AIG World Gold (20%), HSBC Tax Saver Equity (20%) and Morgan Stanley ACE fund (19%).

โ€œMany themes may not have done well in the past few months. Take for example international funds. While performance is one of the metrics, itโ€™s important for the investor to allocate some portion of their MF assets to them. They might do well when global economies rise,โ€™โ€™ S Naren, CIO of ICICI Prudential AMC, said in a recent interview.

Numerous exchange traded funds (ETFs), which track a specific index or commodity, find their place in the marketbeater list with those tracking gold like Gold Benchmark ETF (27%) or banks such as Kotak PSU Bank ETF (32%) doing exceedingly well. Monthly income plans, best suited for getting specified monthly payment to investors like senior citizens and retired persons, also make it to the sensex-beater list. Funds like Reliance MIP (28%), HDFC MIP Long-term (22%), Principal MIP Plus (14%), Templeton MIP-G (12%) and LIC Floater MIP (10%) are some examples.

Investor’s Dilemma : Are ULIPs just another Mutual Fund??

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At almost every investor mind a question is generally cropped up: โ€œWhat is the difference between a ULIP and a Mutual Fund?โ€

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The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

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Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

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As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

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Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

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Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

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Mutual Fund is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

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In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).


ULIPs vs Mutual Funds

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ULIPs are a mix of investment and insurance. ๐Ÿ™‚

But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, donโ€™t even consider a ULIP.

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Charge structure in a ULIP is vastly different from a mutual fund.

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ULIP investors also have the flexibility to alter the premium amounts during the policyโ€™s tenure.

The freedom to modify premium payments at oneโ€™s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

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In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India.

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Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

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ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge.

So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

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So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs. ๐Ÿ™‚

So identify your needs with a financial planner and then pick the product suitable for you.

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ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.

Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, donโ€™t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIP investors also have the flexibility to alter the premium amounts during the policyโ€™s tenure.

The freedom to modify premium payments at oneโ€™s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.

What are ULIPs? How is it different from Mutual funds ?

ULIPs are a mix of investment and insurance

ULIPs are a mix of investment and insurance

At almost every investor mind a question is generally cropped up: “What is the difference between a ULIP and a Mutual Fund?”

The reason, perhaps for the wide extent of confusion, lies largely in the way ULIPs have been sold by agents. As just another mutual fund.

Unit Linked Insurance Policies (ULIPs) as an investment avenue are closest to mutual funds in terms of their structure and functioning.

As is the case with mutual funds, investors in ULIPs is allotted units by the insurance company and a net asset value (NAV) is declared for the same on a daily basis.

Similarly ULIP investors have the option of investing across various schemes similar to the ones found in the mutual funds domain, i.e. diversified equity funds, balanced funds and debt funds to name a few.

Generally speaking, ULIPs can be termed as mutual fund schemes with an insurance component.

And as you would be aware about Mutual Fund, it is a body corporate that pools the money from individual/corporate investors and invests the same on behalf of the investors /unit holders, in various investment avenues like equity shares, Government securities, Bonds, Call money markets etc., as per the pre-specified objective and distributes the profits earned from such investment.

In India, Mutual Funds are registered with the Securities and Exchange Board of India (SEBI).

ULIPs vs Mutual Funds

ULIPs

Mutual Funds

Investment amounts

Determined by the investor and can be modified as well

Minimum investment amounts are determined by the fund house

Expenses

No upper limits, expenses determined by the insurance company

Upper limits for expenses chargeable to investors have been set by the regulator

Portfolio disclosure

Not mandatory*

Quarterly disclosures are mandatory

Modifying asset allocation

Generally permitted for free or at a nominal cost

Entry/exit loads have to be borne by the investor

Tax benefits

Section 80C benefits are available on all ULIP investments

Section 80C benefits are available only on investments in tax-saving funds

ULIPs are a mix of investment and insurance. But very long term investment, not even medium term.Insurance companies themselves admit, that if your investment horizon is anything less than 7 years, don’t even consider a ULIP.

Charge structure in a ULIP is vastly different from a mutual fund.

ULIPs invest for the long term, as they expect investors to stay for the long term. And the purpose of a ULIP is also different build assets through a pension plan, retirement plan or child plan. All of which, need very long term investing, say 10-15 years or even more.

ULIP investors also have the flexibility to alter the premium amounts during the policy’s tenure.

For example an individual with access to surplus funds can enhance the contribution thereby ensuring that his surplus funds are gainfully invested; conversely an individual faced with a liquidity crunch has the option of paying a lower amount (the difference being adjusted in the accumulated value of his ULIP).

The freedom to modify premium payments at one’s convenience clearly gives ULIP investors an edge over their mutual fund counterparts.

In mutual fund investments, expenses charged for various activities like fund management, sales and marketing, administration among others are subject to pre-determined upper limits as prescribed by the Securities and Exchange Board of India. Insurance companies have a free hand in levying expenses on their ULIP products with no upper limits being prescribed by the regulator, i.e. the Insurance Regulatory and Development Authority.

Mutual fund houses are required to statutorily declare their portfolios on a quarterly basis, albeit most fund houses do so on a monthly basis. Investors get the opportunity to see where their monies are being invested and how they have been managed by studying the portfolio.

*There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.

ULIPs also allow you to switch from debt to equity within the same scheme, at no extra charge. So if you want to get the benefits of long term investment and risk cover in one single product, ULIP is the product for you.

So it is not an issue, of whether a mutual fund is better or a ULIP. It is about your need.

Both can co-exist in your basket of needs.

So identify your needs with a financial planner and then pick the product suitable for you.