Mutual funds score over ULIPs in making the most of the midcap stocks rally

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After a dismal show in 2018 and 2019, the mid and small-cap segments registered a remarkable recovery over the last one year and outperformed their large-cap counterparts. The Nifty Midcap 100 total returns index (TRI) and Nifty Small-cap 100 TRI rose by 91 percent and 117 percent, respectively in the last one year, while the NIFTY 50 TRI gave 62 percent returns.

Predictably, schemes that invested in mid-cap and small-cap segments also did well – be they mutual funds or insurance companies through unit-linked insurance plans (ULIPs).

Comparing MFs and ULIPs

Over the last 10 years or so, ULIP mid-cap funds have given returns almost in line with mid-cap MF schemes. But over the last one year, data from Morningstar shows that most of the ULIP midcap funds underperformed. According to Morningstar, ULIP Midcap funds as a category gave 70 percent return over the last one year. This was less than the Nifty Midcap 100 TR index’s return of 91 percent. Midcap mutual funds delivered 76 percent returns during the same period.

There are 17 life insurers that offer a midcap fund to ULIP policyholders.

Defensive positioning led to underperformance

One reason behind the underperformance is the way both sets of portfolios have been typically built. Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance explains, “Last year’s rally has been sharp and unprecedented. Most (ULIP) midcap funds had a defensive portfolio as the COVID pandemic was raging. That caused them to underperform the midcap index.”

“That appears to be a blip in the long-term performance, though. Over the long term (7-10-year time periods), most midcap funds have outperformed their benchmark indices,” Reddy adds.

Among ULIP midcap funds, only Future Generali Life-Future Midcap outperformed the benchmark – the Nifty Midcap 100 index.

ULIP midcap funds that are managing larger corpus such as HDFC Standard Life – Opportunities Wealth Builder Fund (AUM of Rs 23,701 crore as of Feb 2021), Tata AIA Life – Whole Life Mid-Cap Equity Fund (Rs 6,945 crore), Bajaj Allianz Life – Accelerator Mid Cap Fund II (Rs 3,362 crore) have delivered returns of 73 percent, 70 percent and 62 percent, respectively. Even in the case of mutual funds, mid-cap funds with larger corpuses find it tougher to beat markets because they lose their agility and maneuverability to get in and out stocks.

ULIP schemes enjoy more leeway than MFs

In mutual funds, the universe for mid-cap funds has been restricted, as they are mandated to invest at least 65 percent of their assets in companies that are ranked between 101 and 250 in terms of full market capitalisation. In ULIPs, however, the fund managers follow their own market capitalisation classification while managing their funds.

During uncertainties, many ULIP Mid-cap funds have been seen increased allocation to large-cap stocks. Some even held cash up to 35 percent of their overall scheme portfolios. MF Mid-cap funds too can hold a bit of cash and large-cap stocks, but as per guidelines laid down by the SEBI.

Tax advantage removed in high-value ULIPs

Budget 2018 had put mutual funds at a slight disadvantage by re-introducing the long-term capital gains tax of 10 percent. ULIPs were left out of this tax net.

Budget 2021 corrected that anomaly. This year’s Budget bought ULIPs in the income-tax net. If you pay an annual premium of ₹2.5 lakh or more in a year, then the maturity amount – which was tax-free earlier under Section 10(10D) of the Income Tax Act – will now be taxable at long-term capital gains tax rates. The current tax rate is 10 percent tax beyond a gain of Rs 1 lakh in any financial year.

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