IN ULIPS, THE INVESTMENT RISK IN THE INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDERU
The Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Linked Insurance Products completely or partially till the end of the fifth year.
ULIPs and mutual funds are often considered strong alternatives to each other, which can make it confusing when deciding between them. However, understanding these products in depth and knowing their key differences is essential to help you choose the option best suited to your profile.
ULIPs or mutual fund - let’s explore the details.
What is ULIP?
A Unit Linked Insurance Plan is a financial tool that offers dual benefits of investment and insurance. ULIPs offer life cover` that safeguards your family financially after you are no longer around. Additionally, they offer investment in different fund~ options like equity, debt and hybrid so you can achieve your varied financial goals.
What are Mutual Funds?
Mutual funds are pure investment tools that allow you to invest in the market. They pool money from multiple investors into a single fund, which is then invested in securities such as equities, fixed-income instruments and cash equivalents.
What is the Difference Between ULIP and Mutual Funds?
Confused between ULIP or mutual fund? Which investment option to choose? Here is a table highlighting their key differences:
| Point of difference | ULIP | Mutual fund |
|---|---|---|
| Product Type | A ULIP is an insurance-cum-investment product. | A mutual fund is an investment tool. |
| Insurance Coverage | ULIPs offer life cover`. | Mutual funds do not offer any insurance coverage. |
| Investment Objectives | ULIPs allow you to build wealth along with safeguarding your loved ones’ future in your absence. | Mutual funds allow you to build wealth for your short and long-term needs. |
| Return on Investment | ULIP returns are market-linked and depend on the type of funds chosen—equity, hybrid, or debt. Equity funds may offer higher potential returns, but performance varies with market conditions. ULIPs also include life cover`, which adds a protection component. |
Similar to ULIPs, the returns from mutual funds depend on the type of fund you select. However, there are no guaranteed returns in mutual funds. Mutual fund returns are also market-linked, and returns can vary based on the fund type and market performance. |
| Lock-in-period | ULIPs have a mandatory lock-in period. You cannot redeem your money during this period. | Usually, most Mutual funds do not have a lock-in period. However, there are some exceptions. Equity-Linked Savings Scheme (ELSS), Fixed Maturity Plans (FMP) in debt funds and closed-ended mutual funds are some types of mutual funds which come with a lock-in period. |
| Charge Structure | ULIPs have charges, such as fund management charges, premium allocation charges, policy administration charges, mortality charges and others. | Mutual funds have charges like expense ratio, exit load and others. |
| Payment Mode | ULIPs offer the flexibility to pay the premium in monthly, quarterly, semi-annual or annual instalments. Some plans also offer the option to pay the premium in a single instalment. The payouts can be claimed as regular income or as a lump sum. |
Mutual funds allow you to invest through a Systematic Investment Plan (SIP) in weekly, monthly, quarterly, semi-annual or annual instalments. You can also invest in a lump sum. Additionally, the money can be redeemed as a lump sum or in instalments as you see fit. |
| Flexibility | ULIPs are very flexible. They allow you to select the term, frequency of premium payment and funds. They also allow you to switch between funds. | Mutual funds are also fairly flexible. They allow you to select and modify the investment amount, choose the frequency of your SIPs and redeem your money. |
| Liquidity | ULIPs are relatively less liquid as they have a five-year lock-in period. | Usually Mutual funds are relatively more liquid as they do not have a lock-in period, with the exception of ELSS funds, Fixed Maturity Plans (FMP) in debt funds and closed-ended mutual funds. |
| Tax benefits | Investments in ULIPs qualify for deductions up to ₹ 1.5 lakh subject to the conditions prescribed under Section 80C* of the Income Tax Act, 1961 and the maturity proceeds are exempt subject to the conditions prescribed under Section 10(10D)*. | SIPs in ELSS mutual funds also qualify for deduction under Section 80C* of the Income Tax Act, 1961, but other mutual fund categories do not offer any tax benefits. Moreover, all mutual funds are subject to capital gains tax* on returns. |
Questions to ask yourself before deciding between ULIPs and Mutual Funds
Below are some questions that can help you solve the ULIP plan or mutual funds debate:
What are your investment goals?
It is important to understand your investment goals to select the right product. ULIPs can be suitable if you have dual goals like investment and insurance. Mutual funds are better suited if you only wish to create wealth.
What is your risk tolerance?
Both ULIPs and mutual funds offer options for different levels of risk, allowing you to choose the one that suits you best. However, ULIPs come with a few added advantages.
Most ULIPs may offer the flexibility to switch between different fund types—such as equity, debt, or balanced—without potentially triggering capital gains tax. This feature can allow investors to adjust their portfolio in response to changing market conditions, while possibly avoiding immediate tax implications.
In contrast, mutual fund investors typically need to redeem units before switching to a different fund. This redemption is treated as a sale, and depending on how long you’ve held the investment, it may attract capital gains tax.
Another plus with ULIPs is that they include life insurance coverage, offering financial protection to your family in case something happens to you. Mutual funds don’t offer this kind of insurance benefit.
Are you investing for Tax savings under Section 80C?
ULIPs offer deduction of up to ₹ 1.5 lakh per annum subject to conditions prescribed under Section 80C* of the Income Tax Act, 1961. Mutual funds only offer this benefit in the case of ELSS funds. So, if you wish to save some tax along with investing your money, ULIPs can be a better choice.
Do you need Insurance coverage with my investment?
If you need insurance coverage, you can consider investing in ULIPs. Mutual funds do not offer any insurance component.
How much control do you want over your investment?
ULIPs offer more control with options to switch between funds, choosing the tenure and risk management. Mutual funds may offer comparatively less control, as you cannot switch funds within the same plan.
Who should consider investing in a ULIP?
The following people can consider investing in a ULIP:
Individuals with a medium to long-term investment horizon
With a lock-in period, ULIPs are more suited for medium to long-term investment goals. Check your investment horizon, and if you are preparing for such goals, consider a ULIP.
Individuals with varying risk profiles
ULIPs accommodate all risk appetites. No matter your tolerance for risk, you can invest in ULIPs with options tailored to different risk levels.
Investors across all life stages
ULIPs can be suitable across all life stages. You can invest in them as a young professional, a new parent, a mid-career individual, someone nearing retirement or even after retirement. They offer flexible options that can align with your evolving financial goals.
Who should consider investing in Mutual Funds?
The following people can consider investing in mutual funds:
Individuals seeking diversification
Mutual funds can help diversify your portfolio. They invest in a variety of securities, which spreads out risk and reduces the impact of market volatility.
Individuals with a long-term investment horizon
Mutual funds, especially equity funds, can be a good fit for long-term goals. They offer the potential for compounding returns that grow stronger over time.
Individuals with High Net-Worth (HNIs)
HNIs can benefit from mutual funds as they offer multiple options for wealth building. The range of risk and return suits investors with higher capital and greater risk tolerance.
Conclusion - ULIPs or Mutual Funds: Which One to Choose?
ULIPs or mutual fund – the right choice depends on understanding the differences between the two and aligning them with your personal needs. Make sure to take the time to review the comparison above and evaluate which option fits your goals, risk tolerance and investment horizon better.
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