How exactly is the Mutual Fund industry competing?
Now let’s look at the endowment plans there are several from ICICI, HDFC and every private insurer.
These are generating almost the same rate of returns and of course not to forget the tax advantage.
This means if you keep this one in the back the interest that you get from these bank deposits will become taxable.
Whereas if you keep the same money through the insurance companies in the RD basis kind of a plan through endowment plans itself, they become tax-free!
If you are given two of these options which will generate you the same rate of returns, on the one you have to pay tax and on another you don’t have to pay tax to tell me honestly which one would you choose?
Just because of some statement will you go and say put this money in the bank and pay the tax, or if there is an option given to you to save your taxes, what do you do?
That is what the general public is doing, they are realizing that it’s not a waste of money to put money in the endowment plans of the insurance companies.
You have to choose the right product, you have to make the necessary calculation, wherever your calculations show up there is a tax arbitrage which means you can definitely save something out of it, not losing any returns from that, one can make a safe assumption and you can invest money in such plans.
On the other side, ULPI plans are also competing with their mutual fund’s shoulder to shoulder.
Now the maturity proceeds in the ULIP plans are 100% tax free, whereas, the maturity proceeds in a mutual fund plan comes with a 10% capital gains tax.
If you’re investing a small amount of money, it may not be a big difference You’ll feel.
But if you’re a person who’s investing large amounts of money for your retirement purpose this creates a huge tax arbitrage.
The cost of structural of ULIPs has also been brought down.
In most cases, the cost structure of ULIPs is lesser than the mutual fund’s regular scheme.
So there is an arbitrage that is available in ULIP plans, provided you pick the right type of ULIP plans, make your due diligence, find correct answers and think whether it is right for you or not.
After due diligence, if you buy the ULIPs they can give you much better tax-adjusted returns than the mutual funds themselves.
Dear readers, the purpose of this blog article is not to move away from mutual funds and term insurances.
Even today if you need large insurance there is nothing else that can replace term insurance.
That’s still the best form of insurance!
Mutual Funds are evergreen, as usual, they can be used by any age group of people with any amount of money that can come under the mutual funds.
But there are other advantages in the insurance industry as well.
In the first 50 years, of insurance industry in this country people bought insurance for the sake of saving on their taxes.
They compromised on returns!
Today you can still do save the taxes by using the insurance product, but you don’t need to compromise your return.
The endowment plans have evolved so much did you have almost the same rate of return as bank FDs but you don’t have to pay taxes.
Likewise, ULIPs gives the same rate of return as that of the Mutual Fund and you don’t have to pay any taxes.
Now it is left for you to decide should you use this avenue to save on the taxes compromising your return potential.
We leave this decision to you.
If you’re a person who is confused, all that we would say is consult you financial planner or straight away connect with us!
We will definitely help you to arrive at the best possible decision for you.
We hope you got to something new today!
Until next time…