Are changes in MFs, ULIPs good for the consumer?

It is a contest that could prove to be ultimately beneficial for the informed investors. The recent regulation changes introduced by the Securities Exchange Board of India (SEBI) for the mutual funds and the Insurance Regulatory and Development Authority (IRDA) for unit linked insurance plans more popularly called the ULIPs has created a level playing field in both the mutual funds and the ULIPs investment scenario.

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Recently, SEBI removed the entry load for mutual funds while the IRDA has come out with a cap on ULIP charges. These regulation changes will create the much-needed transparency in both the fields, ensure better accountability and more importantly help the informed investors reap better value on their investments.

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IRDA's new cap on ULIP: The highlights

Let us briefly see the IRDA's cap on ULIP that will come into effect from October 1, 2009, and how as an investor this will benefit you.

There are changes in the overall charge structure for policies with tenure of less than or equal to 10 years and for policies with tenure over 10 years. In the former case, the maximum cap will be at 3 per cent of gross yield while the fund management charges will be at 1.5 per cent and in the latter case the max cap will be at 2.25 per cent and the fund management charges not to exceed 1.25 per cent.

Other changes in the charge structures include no surrender charges applicable post 5 years of policy, and an obligation on the part of the insurers to give on maturity a certificate to policy holders showing the break up of the policy amount including annual premiums, charges deducted, the actual fund values, and partial withdrawals (if any) and the final amount payable.

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So how this will benefit you?

As an investor you may have a reason to smile and might stand to gain!

The new ruling will give you net yield of 9.75 per cent back to you for a fund that is earning a gross yield of 12 per cent. For instance if your policy with premium is worth Rs 100,000 per year for a term of 10 years, the new cap at 3 percent on overall expenses for year-on-year will put your fund value at Rs 14.78 lakh at the end of the term.

Also, the new obligation on the insurers' part to show the break up of the policy amount will enable you to make an informed decision.

SEBI's 'no' to entry load for mutual funds: the highlights

The SEBI's removal of entry load for mutual funds is effective from August 1, 2009. The market regulator has also capped the expenses of asset management companies out of exit load to 100 bps. SEBI has asked the mutual funds to chew over the idea of reducing the tenure of the exit load, which has been revised to higher than one year effective from August 1.

So what this means to you!

If you are an informed customer SEBI's new rule to end the entry load on mutual funds is an obvious advantage for you as there will be more transparency.

Gone are the old times when the payment of a separate fee for the distributor/agent was made out of the units that you buy which resulted in you getting only a fewer number of units for what you paid for.

With the new rule, you can now know how much commission is being paid to the distributor/agent or simply choose to not take any advice from your distributor/agent on the scheme to invest in and thus save the payment of the separate fee for the distributor/agent for the service. Also, you can buy the units directly from the fund management company.

What to choose now: ULIPs or mutual funds?

Well, it depends on the individual's preference as the two are two different avenues offering two different types of investments.

If you are someone daring to invest in a moderate to high-risk investment scenario then mutual funds could work better for you. The objective of a mutual fund investment is usually short term. And if you have a medium or a long-term objective with moderate risk factors, then ULIPs will suit you better. ULIPs will essentially serve the medium or long-term purposes of retirement, children education and others.

Despite the recent SEBI regulation to do away with the entry load for mutual funds, the fee on Assets under Management (AUM) could, in some cases, prove to be costlier than the entry load on the invested amount! However, if you are an informed customer then you could choose to skip seeking the advice of the distributor/agent and thus save the AUM charges.

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Also, the ULIPs are better placed in the sense they come with the element of insurance. Mutual funds could cost you more if insurance needs to be added. The new EET regime (Exempt-Exempt-Taxable) proposed recently could move the investors away from mutual funds as irrespective of when the investment was made, the returns are still taxable post EET regime. In the case of ULIPs, the returns on the ULIP investments made before the EET regime are tax-free.

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