ULIPs back in focus after debt mutual funds taxation; But do they make sense?

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Post the amendment to the Finance Bill 2023 that took away the indexation benefit and long term capital gain tax benefit away from debt mutual funds, they have now come on par with the Bank Fixed deposits (FDs) in terms of taxation. Meanwhile, the maturity proceeds received from the Unit Linked Insurance Plans (ULIPs) enjoy tax free status subject to some conditions. Simply put, as per the current rule, after the lock-in period of five years, the maturity amount is tax-free if your annual premium paid for the ULIP will be Rs 2.5 lakh and below. The proceeds from ULIPs will lose their tax-exempt status if the total premiums for all ULIP policies (single or multiple) surpass Rs. 2.5 lakh annually. Capital gain tax is applicable on those maturity proceeds (Read here: I-T department clarifies taxation rules of ULIP maturity proceeds). This makes ULIP debt funds are more attractive for small investors than the debt mutual funds and bank FDs. — Post the amendment to the Finance Bill 2023 that took away the indexation benefit and long term capital gain tax benefit away from debt mutual funds, they have now come on par with the Bank Fixed deposits (FDs) in terms of taxation. Meanwhile, the maturity proceeds received from the Unit Linked Insurance Plans (ULIPs) enjoy tax free status subject to some conditions. Simply put, as per the current rule, after the lock-in period of five years, the maturity amount is tax-free if your annual premium paid for the ULIP will be Rs 2.5 lakh and below. The proceeds from ULIPs will lose their tax-exempt status if the total premiums for all ULIP policies (single or multiple) surpass Rs. 2.5 lakh annually. Capital gain tax is applicable on those maturity proceeds (**Read here: I-T department clarifies taxation rules of ULIP maturity proceeds**). This makes ULIP debt funds are more attractive for small investors than the debt mutual funds and bank FDs.

The debt funds offered under ULIP plans are likely to gain more investors’ attention. “There is no other alternative fixed-income option which will give similar superior risk-adjusted returns to the policyholder, with the additional benefit of tax”, says Arun Srinivasan, Head – Fixed Income, ICICI Prudential Life Insurance. Bank FDs come with penalty charges for premature withdrawals, although they’ve been in focus too, thanks to high prevailing interest rates. Here’s where ULIP debt funds retain a bit of the lustre. ULIP debt funds offer the flexibility to switch between funds and the added tax benefit make them a compelling buy to create long-term wealth adds Srinivasan. Most insurance companies provide this facility of switching among the fund options for free of charge. “Matured investors can predict the market correctly to benefit from such switches” says Melvin Joseph, Managing Partner of Finvin Financial planners. However, Joseph cautions on the entry charge, policy administration charge, mortality charge etc which will reduce the return on investment from the ULIP funds. Here, we compiled the list of medium to long duration ULIP debt funds from Morningstar.in. We further shortlisted the funds based on the 5-year rolling returns that were calculated from the last ten years’ NAV history. We selected only the funds offered for the plain vanilla life policies and excluded the funds pertaining to the pension and health policies. Also, only funds with track record of above 10-years were considered. These ULIP funds delivered similar returns to that of the debt mutual funds. The returns shown in the below slides were adjusted to fund management charges but not adjusted to other charges such as premium allocation, policy administration etc that ULIPs levy. — The debt funds offered under ULIP plans are likely to gain more investors’ attention. “There is no other alternative fixed-income option which will give similar superior risk-adjusted returns to the policyholder, with the additional benefit of tax”, says Arun Srinivasan, Head – Fixed Income, ICICI Prudential Life Insurance. Bank FDs come with penalty charges for premature withdrawals, although they’ve been in focus too, thanks to high prevailing interest rates. Here’s where ULIP debt funds retain a bit of the lustre. ULIP debt funds offer the flexibility to switch between funds and the added tax benefit make them a compelling buy to create long-term wealth adds Srinivasan.
Most insurance companies provide this facility of switching among the fund options for free of charge. “Matured investors can predict the market correctly to benefit from such switches” says Melvin Joseph, Managing Partner of Finvin Financial planners. However, Joseph cautions on the entry charge, policy administration charge, mortality charge etc which will reduce the return on investment from the ULIP funds.
Here, we compiled the list of medium to long duration ULIP debt funds from Morningstar.in. We further shortlisted the funds based on the 5-year rolling returns that were calculated from the last ten years’ NAV history. We selected only the funds offered for the plain vanilla life policies and excluded the funds pertaining to the pension and health policies. Also, only funds with track record of above 10-years were considered. These ULIP funds delivered similar returns to that of the debt mutual funds. The returns shown in the below slides were adjusted to fund management charges but not adjusted to other charges such as premium allocation, policy administration etc that ULIPs levy.

ULIP Fund Name: ICICI Prudential Life - Protector Fund II Launch Date: 20-May-2004 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 36:62:2 Modified Duration: 5.08 Years — **ULIP Fund Name: ICICI Prudential Life – Protector Fund II**
Launch Date: 20-May-2004
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 36:62:2
Modified Duration: 5.08 Years

ULIP Fund Name: Tata AIA Life - Whole Life Income Fund Launch Date: 6-Feb-2007 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 68:22:10 Modified Duration: 4.2 Years — **ULIP Fund Name: Tata AIA Life – Whole Life Income Fund**
Launch Date: 6-Feb-2007
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 68:22:10
Modified Duration: 4.2 Years

**ULIP Fund Name: HDFC Standard Life – Secure Managed Investment Life**
Launch Date: 2-Jan-2004
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 51:44:5
Modified Duration: 4.3 Years

**Read here: Six fixed income products for you in this high interest rate scenario**

ULIP Fund Name: ICICI Prudential Life - Protector Fund IV Launch Date: 27-Aug-2007 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 47:40:13 Modified Duration: 4.3 Years — **ULIP Fund Name: ICICI Prudential Life – Protector Fund IV**
Launch Date: 27-Aug-2007
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 47:40:13
Modified Duration: 4.3 Years

ULIP Fund Name: Tata AIA Life - Bond Fund Launch Date: 13-Jan-2009 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 67:30:3 Modified Duration: 4.4 Years — **ULIP Fund Name: Tata AIA Life – Bond Fund**
Launch Date: 13-Jan-2009
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 67:30:3
Modified Duration: 4.4 Years

**ULIP Fund Name: Aditya Birla Sun Life – Individual Income Advantage Fund**
Launch Date: 22-Aug-2008
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 57:39:4
Modified Duration: 6 Years

**See here: SIPs work for debt funds, too. And, they beat bank FDs. Here’s the proof**

ULIP Fund Name: Kotak Mahindra Old Mutual Life - Kotak Dynamic Bond Fund Launch Date: 15-Apr-2004 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 59:35:6 Modified Duration: 4.7 Years — **ULIP Fund Name: Kotak Mahindra Old Mutual Life – Kotak Dynamic Bond Fund**
Launch Date: 15-Apr-2004
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 59:35:6
Modified Duration: 4.7 Years

ULIP Fund Name: Max Life Secure Plus Fund Launch Date: 7-May-2009 Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 73:25:2 Modified Duration: 5.3 Years — **ULIP Fund Name: Max Life Secure Plus Fund**
Launch Date: 7-May-2009
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 73:25:2
Modified Duration: 5.3 Years

**ULIP Fund Name: SBI Life – Bond Fund**
Launch Date: 10-Jan-2005
Portfolio allocation (G-secs: Corporate debt: Money market & Cash): 48:49:3
Modified Duration: 4.7 Years

**Also see: HDFC Short Term Debt Fund: An all-weather debt fund has delivered across rate cycles**

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