IF you want to truly know what a pain conflicting advice can be then try being pregnant. The gentlemen reading this piece may be excused from this endeavor but I'm sure you'll get the gist of what we're talking about. Eat papaya. Don't eat papaya! Exercise.Don't you dare tire yourself! Sleep on your right. Sleep on your left! Drink orange juice for a bonny baby. Drink coconut water for a bonny baby! You get the point?

So, for those of you who find conflicting advice as painful then this piece should help reduce one area where it rears it's ugly head -- Unit Linked Insurance Plans (ULIPS).

- ULIPs are very expensive and hence must be a kept away from.
- ULIPs are a convenient modern day investment option.
- The returns on ULIPs are on the investible amount, not what you put in, so stay away.
- ULIPs are better than traditional policies.

Which one is true?

ULIPs v/s traditional policies

The main issue starts with the fact that ULIPs opted for honesty. Nobody wanted to know what traditional policies charge. ULIPs made the mistake of making the charge transparent. Policyholders were taken aback by the high amount of fees that ULIPs charged not realising that traditional policies too charge high administrative and management expenses.

This can have a bearing on returns as well. A ULIP may charge you upfront but thereafter, all the returns on the fund are yours while a traditional policy may charge less but share a smaller portion of returns with you.

So, if you were substituting a traditional endowment with a ULIP, you would be better off with the latter since you would know your charges and your returns.

ULIPs v/s MFs

ULIPs can go hand in hand with instruments like Mutual Funds (MF). Vivek Khanna, Director Marketing at Avvia India Insurance, says, "We feel that a person must hold both, an MF and a ULIP in his portfolio. An MF will serve a short term need and ULIP the longer term one."

ULIPs and MFs differ largely in their charge patterns. Mutual funds charge an entry load of 2-2.5 per cent on every investment plus an investment management fee of similar proportions. As against that, ULIPs charge a high fee of around 20-25 per cent in the first year of the policy. This tapers down as the years go by.

Investment consultant Ajay Bagga gives his view, "None of the ULIPs have been around for a period of 10 years and hence it is difficult to compare their returns with mutual funds. However, assuming both ULIPs and MFs give the same returns, it can be said that ULIPs will compare with MFs in the long term, as far as charges are concerned."

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e-mail: Deepa Venkatraghvan

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