December 29, 2025 - 5 min. read
Unit-linked insurance Plans combine insurance coverage and investment possibilities, providing policyholders the flexibility to plan their financial futures according to their needs. Like any financial product, these plans involve various charges. Among them, the fund management charges are a recurring expense that influences how invested funds grow over the years. In this article, we will learn about what these charges include, how they function, and why they matter for investment outcomes.
ULIP plans
ULIP plans function by dividing premiums into two components: one provides life insurance coverage, while the other gets invested in market-linked funds that align with the policyholder's risk tolerance. Whether one prefers the growth potential of equity, the stability of debt, or a combination through balanced funds, ULIPs allow investors to align their portfolios with financial objectives and desired time horizons.
What is the fund management charge (FMC)?
Fund management charges meaning is the fee paid to insurance companies for professionally managing ULIP investments. It covers costs related to market research, portfolio monitoring, administrative activities, and fund monitoring carried out by experienced fund managers.
Instead of being charged separately, FMC is deducted by cancelling a small number of units from the fund at regular intervals, usually monthly. Regulators also prescribe maximum limits on these charges, which vary based on fund type and policy tenure.
Now that you know what the fund management charge is, let's see how it is calculated further in the article.
How are fund management charges (FMC) calculated in ULIPs?
Step 1: The insurance company determines the applicable FMC rate as a percentage of the fund value, which varies depending on the type of fund selected, with equity funds typically charging higher rates than debt funds.
Step 2: The total fund value in the policyholder's account is assessed at regular intervals to calculate the absolute charge amount based on the current market value of accumulated units.
Step 3: The calculated charge amount is converted into the number of units to be redeemed by dividing it by the prevailing Net Asset Value per unit on the date of deduction.
Step 4: These units are automatically cancelled from the policyholder's account, reducing the total unit balance, while the proportional ownership in the remaining fund value stays reflected through fewer units at the current NAV.
Factors affecting fund management charges in ULIPs
The following factors impact the FMC in ULIPs.
Fund type: The kind of fund you pick makes a significant difference in the amount you'll pay. Equity funds need constant monitoring, trading, and research, while debt funds are generally simpler to manage, so their fees tend to be lower.
Tenure: How long you commit to your policy also matters, as several insurers reduce their charges for people who stay invested for longer periods. This encourages investors to think beyond short-term gains.
Fund size: Premium amount and fund size can impact charges, as larger fund values may benefit from economies of scale. This allows insurers to spread fixed management costs across a broader asset base.
Regulations: Government regulators cap these charges by setting maximum limits. The rules are revised over time to ensure ULIPs remain competitive with other investment products.
Impact of fund management charges on returns
Here’s how FMC may impact your returns.
Potential gains: Fund management charges impact your returns by reducing the capital invested for growth. Over some years, the effect on returns may become substantial.
Compounding effect: A small variation in the cost of charges every year can make a big difference if one remains invested for a period of 15 to 20 years, since a small percentage adds up with the help of compounding.
Net returns: The less you pay in management fees, the more of the mutual fund's gains are retained rather than being used for expenses. This can increase your net rate of return.
Conclusion
Understanding fund management charges remains crucial for anyone considering ULIPs as an investment vehicle. These recurring costs directly affect the final returns received at maturity. These charges compensate insurers for professional fund management services. Policyholders should carefully evaluate rates across different providers and fund types to optimise their investment efficiency and align costs with their financial objectives.
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