For a long time, ULIP (unit-linked insurance plan) had become the financial market's favourith four-letter word. There was good reason. This insurance-investment combination product was being grossly mis-represented. Agents and sales reps were earning unbeliable commissions and, unfortunately, the bad eggs took advantage of this.

Despite all this, ULIP can be a great instrument to invest in, if you ar willing to stick to it for a long period of time- in the range of 10 to 20 years. If you have a short span of time at your disposal, it is better to invest in mutual funds and buy term plans to take care of your insurance coverage.

Main differences between ULIP and ordinary mutual funds is variation in expenses administrative charges, mortality charges and, of course, fund management fees. We are going to compare the two products to suggest that, over a longish period, ULIP's expenses work out to be lower than that fo an equity mutual fund, and so you end up getting more of your money to work for you.

Since insurance companies charge enormous selling expenses in the range of 15% of the first year's premium, shortterm investors stand to lose. But, if one were to analyse the benefits of ULIP's over mutual funds, all else being equal, there may be reason to look at ULIP's purely because of the lower expense ratio: The asset management charge (AMC) of insurance ocmpanies is 1.5% whereas in the case of mutual funds it is around 2.5%.

Therefore, in the longer term, when the funds of individual investores under management become large, the difference of 1% matters a lot. It offsets the higher charges taken by insurance companies during the earlier period of the fund.

Take for example an insurance company and a mutual fund, giving the same return of 10% per annum. The insurance company charges 40% fo the first years's premium as selling expenses and 5% of premium every year as administrative charges. A person buys a unit-linked policy for 20 years, with a life coverage of Rs 20 lakh, and pays a premium of Rs 1 lakh per annum.

In first year, Rs 40,000 will be deducated from his premium as commission, and Rs 5,000 as administrative charge. If the person's age is 30, the mortality charge of Rs 2,763 will also be deducated. Furthermore, 1.5% asset management charge will also be deducated from this. Therefore, in the first year, the inverstor will get units worth Rs 51,453 only.

In the next year, his charges will be limited to 5% of the second year premium of Rs 1 lakh. plus mortality charges of Rs. 2,654. Therefore, the net addition to the fund will be Rs 92,346 from the premium. If in the first year, the fund gave a return of 10% the net investment of Rs 51,453 in the first year willl become Rs 56,598. If the fund continues to earn a return of 10%, the person will get Rs 45,59,846 after maturity.

In case of MF, however, there is no selling charge, but there is an entry load ofo 2.5% of the premium every year. Besides this there will be asset management charge of 2.5% of the corups.

This is mainly because of the 2.5% charge in the case of mutual fund as against 1.5% in ULIP. Because of 1% difference, the MF company charges much more than the insurance company. Towards end of the fund's life when corpus become large, the difference can be huge. The mutual fund company would end up charging Rs 82,198 in the 17th year and Rs 1,09,803 in the 20th year. As against this, the insurance company would charge Ts. 50,614 in the 17th year and Rs 69,439 in the 20th year.

In short term, return from MFs is better. If an investor goes for only 10 years instead of 20 his maturity amount in ULIP will be Rs 14,03,526 as against Rs 14,32,703 in MF. For 15 years, maturity amount of Rs 1 lakh premium will be Rs 26,76,504 in the case of ULIP and Rs 26,24,757 in mutual fund.