Understanding Fund Management Charges in ULIP: A Complete Guide

What are ULIP Fund Management Charges?

Fund management charges in ULIP are the fees that insurance companies charge for managing your investments. Think of it as the cost of hiring a professional to take care of your money, tracking markets, choosing funds, and making decisions that help your wealth grow.

Every ULIP has fund managers who manage different types of funds like equity, debt, or hybrid. Their work involves research, analysis, and portfolio balancing. To cover this cost, the insurer deducts fund management charges in ULIP plans from your fund value.

If you are an NRI investing in ULIPs in India, the Insurance Regulatory and Development Authority of India (IRDAI) allows insurers to charge a maximum of 1.35% per year as Fund Management Charges (FMC). This ensures investors are protected from excessive fees.

How are Fund Management Charges in ULIP Calculated?

Fund management charges in ULIP are calculated as a percentage of the Net Asset Value (NAV) of your chosen fund. NAV is simply the per-unit price of your ULIP fund, based on the total market value of all its assets.

Here’s a simple example —

Let’s say your fund’s NAV is AED 100, and the FMC is 1.35% per year. Then, every day, your insurer deducts a small portion of this —

(1.35%/365)×AED100 = AED 0.0037 per day

This small daily deduction is automatically adjusted in the NAV, so you don’t have to pay it separately. It continues as long as your investment remains in the fund.

Different Types of Fund Management Charges in ULIP Plans

Here are some of the common types of ULIP fund management charges —

 1. Premium Allocation Charge

This is the first deduction made from your premium before any investment. It covers expenses such as agent commission, underwriting, medical tests, and policy setup. 

For example, if you pay AED 10,000 and the allocation charge is 10%, AED 1,000 goes toward costs and AED 9,000 is invested. These charges are usually highest in the first year and decrease in later years.

2. Fund Management Charge (FMC)

This charge is the fee for managing your investments. It’s expressed as a percentage of the fund’s value and deducted daily from the Net Asset Value (NAV).

3. Policy Administration Charge

These are monthly fees for maintaining your policy, covering record-keeping, customer support, and other administrative costs. They can be a fixed amount (e.g., AED 30/month) or a small percentage of the premium. Though small individually, they reduce your fund value over time.

4. Mortality Charge

This is the cost of life cover under your ULIP. It depends on your age, gender, policy term, and sum at risk (the difference between the sum assured and fund value). Older policyholders pay more due to higher mortality risk. 

5. Switching Charge

ULIPs let you move your money between different types of funds, depending on how the market is doing. Most insurance companies let you change your fund a few times a year for free (about 4–6 times). 

After that, they take a small fee each time you switch (around AED 10–500). Switching is helpful to keep your money plan on track, but doing it too often can lower your earnings.

6. Top-Up Charge

ULIPs allow additional investments called top-ups beyond regular premiums. A small fee (1–3%) is deducted from each top-up. Top-ups can increase your investment and sum assured, but they may also raise mortality charges.

7. Premium Discontinuance Charge

If you stop paying premiums before the 5-year lock-in period, a discontinuance charge applies. Your fund moves to a Discontinuance Fund, where growth is limited. The charge decreases with each policy year, rewarding long-term investors who stay invested.

8. Premium Redirection Charge

This applies when you change how future premiums are invested across different funds. It’s different from fund switching, which applies to existing investments. Some plans allow a few free redirections, while others charge a nominal fee after a limit.

9. Rider Charges

Riders are add-on covers like accidental death or critical illness benefits. They come at an extra cost, either added to your premium or deducted from your fund value. Rider charges vary based on age, sum assured, and policy type.

10. Partial Withdrawal Charge

After the 5-year lock-in, you can withdraw part of your fund value for emergencies like education or medical needs. Many insurers allow limited free withdrawals each year. After that, a small fee applies. Frequent withdrawals can reduce your long-term corpus.

11. Policy Surrender / Discontinuance Charge

If you surrender your ULIP before completing the lock-in, the insurer deducts a surrender charge. Your money is moved to a Discontinuance Fund, and payouts are made only after 5 years. Early exits often lead to reduced benefits.

12. Guarantee Charge

Some ULIPs offer guaranteed returns or capital protection features. The guarantee charge compensates the insurer for taking this risk. It’s usually a small percentage deducted periodically from your fund value and applies only to select guaranteed ULIPs.

13. Miscellaneous Charges

These are small administrative fees for policy updates, like changing the nominee, payment frequency, or contact details. Although minor, frequent changes can add up, so it’s best to minimise them.

Factors that Affect Fund Management Charges in ULIPs

The ULIP fund value after charges directly reflects how much FMC affects your returns. Even a small difference in fund management charge can lead to a big gap in long-term wealth. The higher your FMC, the more it eats into your returns over the years. 

The ULIP fund management charges depend on several factors. Let’s understand them —

1. Type of Fund: Equity funds (which invest in stocks) usually have higher FMCs, around 1.35% p.a., because they require active management. Debt funds or liquid funds, which are less risky, may have lower FMCs — around 0.75% to 1% p.a.
2. Investment Strategy: Actively managed funds cost more than passively managed or index-linked funds.
3. Size of the Fund: Larger funds may enjoy economies of scale, which can slightly reduce FMC.
4. Insurance Company: Different insurers have different pricing models depending on their operational costs and investment expertise.
5. Regulatory Limits: IRDAI caps the FMC to protect policyholders, ensuring the fund management charges in ULIP plans remain fair and transparent.

How to Minimise Fund Management Charges in ULIP Plans?

When reviewing a ULIP, keep these points in mind —

• Compare FMCs across insurers for similar fund types.
• Read policy documents carefully to know all charges, not just FMC.
• Review past fund performance to ensure the returns justify the charges.
• Choose a long-term ULIP (10+ years) to spread out initial costs.
• Avoid frequent switches or withdrawals to save on extra fees. ULIPs are long-term products, so focus on consistent returns after charges.
• Understand your risk profile: Higher-risk funds often come with higher FMC, but also the potential for higher gains.

How to Minimise the Impact of Fund Management Charges

• Choose ULIPs with low FMC: Some modern ULIPs now offer fund management charges as low as 0.8%–1%.
• Stay invested long term: Many ULIP costs reduce over time, so staying invested beyond 10 years maximises growth.
• Compare before investing: Use the sales benefit illustration on the insurer’s website or trusted platforms like Policybazaar.ae to see how your fund value changes after charges.
• Opt for passively managed funds: Index-based or balanced funds may have lower FMC while still providing steady returns.

Why Understanding Fund Management Charges Matters

Knowing what are ULIP fund management charges helps you —

• Avoid hidden costs
• Choose cost-effective plans
• Improve long-term returns
• Align investments with your financial goals

A little awareness today can make a big difference in your wealth tomorrow.

Conclusion

Fund management charges in ULIP may look small, but they play a huge role in shaping your long-term returns. When comparing ULIPs, don’t just look at benefits or returns — pay close attention to how much you’re paying to have your funds managed.

With the right understanding, you can select a plan that offers reasonable charges, strong fund performance, and long-term growth. This helps you achieve your financial goals smartly.

Key Takeaways

• ULIP fund management charges are the cost of managing your investment portfolio
• They’re capped at 1.35% per annum by the IRDAI (in India), although the charges may vary as per the country
• Lower FMC means higher ULIP fund value after charges
• Always compare FMCs across insurers before investing
• Transparency in charges ensures you make informed choices

Frequently Asked Questions