Mutual Funds have turned more attractive after the Securities and Exchange Board of India (SEBI) abolished the entry load of upto 2.25 percent on all mutual fund investments that earlier got deducted upfront from your investments as commissions to the distributors.

Not only does it make mutual funds more efficient, it becomes even more attractive against the unit linked insurance plan (ULIP) of insurance companies that are lot similar to the mutual funds.

Advantage mutual funds

The returns on your mutual funds will simply go up by over 2.25 percent because of the benefit of compounding on the incremental investment into your portfolio of 2.25 percent. If a fund generates a return of 10 percent per annum for 5 years then a monthly investment of Rs 10,000 for 60 months without the entry load would accumulate to Rs 771,815, up from Rs 754,448 when a 2.25 percent entry load is applicable. This is a rise of 2.3 percent in the total accumulation but a gain of 11 percent in the capital gains that you have after five years.

So there is an added incentive to invest in a mutual fund.

How it fares against a ULIP

While the upfront charge in ULIP is far more than the entry load in a mutual fund, the returns that ULIPs will generate will be far lower than the mutual funds if both manage to get similar returns. This is of a lower amount getting invested in Ulips.

Just in case you want to have both an insurance policy and mutual fund in your portfolio and your insurance agent is pressing hard to go for a ULIP, think twice before you opt for one.

"One should always keep investments and insurance separate and it is better to take a mutual fund and term plan rather than going for a bundled product," said Surya Bhatia, a Delhi based financial planner.

A mutual fund will see your entire invested amount actually getting allocated towards your portfolio. All you pay is an average annual fee of 1.25 percent to your fund manager as investment management fee. However in case of Ulips you pay a significant amount of your investible money as fund allocation charge (where majority goes as commission to the distributor) and other than that you pay the investment management fee similar to the mutual funds. The mortality charge towards your insurance cover in Ulip goes as a separate head, along with charges like policy charges and miscellaneous charges.

To keep it very simple if we take into account only the investible portion in a mutual fund and Ulip then mutual funds generate a return of over 10 percent higher than that given by a Ulip.

While the fund management cost remains the same for both Ulips have premium allocation charge of 30 percent in the first year, 10 percent in the second year and 5 percent beginning third year.

"Mutual funds have a clear head-start because of the low cost," said Bhatia.