Are ULIP’s better than Equity to save LTCG?

After the introduction of Long Term Capital Gains (LTCG) tax on equity income, there is news floating around that, investing in ULIP’s will help investors save the tax. It is just a 10% tax on an income which is far higher than any other asset. To escape that, the effort that people have been taking is showing clearly the reason why retail investors have not made money in stocks.

The returns that ULIP’s have given in the last 5 years is 9.21% for large cap and 18.31% for a small cap. As against the average returns that mutual funds have given in the same period at 14.73% for large cap and 26% for Small cap. Even if capital gains are paid, the net returns will be far higher than what ULIP’s will make for its investors.

Products 5 years CAGR Taxes Nett
Mutual Funds 14.73 1.473Lakhs 13.26
ULIPS 9.21 0 9.21

Over a longer period, compounding will create big magic to the Mutual Fund returns which the ULIP investors will lose. Once the age is passed & opportunity is lost, one has to live with mediocre life, just because of these kinds of hasty decisions. Instead of worrying about the 10% tax, just continuing to be invested will give them far higher returns than taking action to sell their investments and moving them to ULIP’s to save the 10% tax, eventually they will be losing near 200% of opportunity.

1 Lakh Investment after 20 Years
Mutual Funds 14.15 Lakhs
ULIPS 5.82 Lakhs

1 lakhs invested at 9.21% for 20 years will generate a corpus of 5.82 lakhs. The same 1 lakh in Mutual Funds even after paying 10% capital gains tax will be 14.15 lakhs. Be prudent, don’t panic for paying 10% tax and move your investments, in the bargain the brokers and government are the beneficiaries.