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.
What is ULIP?
A ULIP is an insurance product that also allows you to invest your money in the market. The plan offers life coverage` to protect your loved ones in your absence. Additionally, it allows you to invest in equity, debt and hybrid funds$ and build wealth over time.
What is SIP?
A SIP is an investment method that allows you to invest in mutual funds periodically. SIPs can be made at your preferred frequency, such as weekly, monthly, quarterly or annually. You can fix an amount and invest the same in a chosen fund at your desired frequency.
What is the Difference Between ULIP and SIP?
Below is a table highlighting the key differences between ULIP and SIP:
| Point of difference | ULIP | SIP |
|---|---|---|
| Type of investment | A ULIP is an insurance-cum-investment product that combines life insurance with market-linked investments | SIP is not an investment itself, but a method to invest in mutual funds, which are pure investment products |
| Investment objective | The objective of a ULIP is to provide both financial protection through insurance and long-term investment returns | The primary goals of investing through a SIP are wealth creation and financial discipline |
| Risk Profile | ULIPs carry varying levels of risk depending on the chosen fund, such as equity, debt or hybrid, but they also offer a life cover` | SIPs in mutual funds also carry varying risk profiles based on the selected fund, but they do not offer any life insurance cover, which makes them relatively risky |
| Liquidity | ULIPs generally come with a lock-in period, during which you cannot access your money. This makes them less liquid | SIPs generally do not have a lock-in period and are more liquid. However, Equity-Linked Savings Scheme (ELSS ) is an exception which comes with a three-year lock-in period |
| Fund switching | ULIPs offer the flexibility to switch between equity, debt and hybrid funds within the same policy without any tax implications or extra charges | SIPs do not provide the option to switch within the same plan. However, you can redeem units from one fund and reinvest it in a different mutual fund |
| Transparency | ULIPs are very transparent and offer complete information on charges, portfolio allocations and more | Mutual funds are also highly transparent and provide a high level of transparency about portfolio holdings, fund performance and more |
| Suitable for | ULIPs are suitable for those who want investment along with life insurance | SIPs are suitable for people looking only for investment |
Who Should Consider Investing in a ULIP?
Below are people who can consider investing in a ULIP:
Individuals with a medium to long-term investment horizon
ULIPs generally have a lock-in period, which makes them more suitable for people with medium to long-term financial goals. If your goals are not immediate, a ULIP can be a good investment option.
Individuals with varying risk profiles
ULIPs cater to different risk appetites, as they offer a range of fund$ options, such as equity, debt and balanced. All types of investors, from conservative to aggressive, can invest in ULIPs.
Investors across all life stages
ULIPs can be ideal for individuals at various life stages. They can be aligned with different life goals through their flexible investment options.
ULIPs or SIP - What Factors should you Consider Before Deciding?
Below are some factors that you must consider when determining which is better to choose between SIP and ULIP:
Investment Goals
Your investment goals determine the amount of risk you can take, the type of growth you require and how much you can invest. Clarifying your goals helps you select the most suitable option.
Investment Horizon
Mutual funds can be suitable for all types of investment horizons. However, ULIPs come with a lock-in period, which makes them suitable for only medium to long-term goals. So, if your investment horizon is short, you can consider SIPs in mutual funds. However, for longer terms, both SIPs and ULIPs can be considered.
Expected Returns
Both SIPs and ULIPs are market-linked and their returns can vary depending on the funds you invest in. However, ULIPs also offer death benefit as an assured component.
Insurance Requirements
ULIPs come with life insurance coverage` that protects your loved ones after you, while SIPs do not. If insurance is your priority, a ULIP may serve your needs better.
Transparency
Make sure to consider how much transparency you expect. While both ULIPs and mutual fund SIPs are transparent, the exact level can vary depending on the insurance company or asset management firm you choose.
Liquidity Needs
SIPs generally offer more liquidity since most mutual funds do not have a lock-in period, except ELSS funds. If you require easy access to your funds, SIPs may be more suitable.
How to Calculate and Compare Returns on SIP and ULIP Investment?
You can calculate SIP returns using the following formula:
The formula1 for calculating returns from a SIP is as below: Amount Invested × ({[1 + Periodic Rate of Interest] ^ Total Number of Payments – 1} / Periodic Rate of Interest) × (1 + Periodic Rate of Interest)
Alternatively, you can use an online SIP Calculator for a quicker estimate.
There are two commonly used methods to calculate returns from a ULIP:
Below mentioned are the two most commonly used method to calculate returns from a ULIP2:
Absolute Return
- This method calculates the total return earned over a period without considering time.
Formula: [(Current NAV - Initial NAV) / Initial NAV] × 100
Compounded Annual Growth Rate (CAGR)
- This method accounts for the duration of investment and provides an annualised return.
Formula: {[(Current NAV / Initial NAV) ^ (1 / Number of Years)] - 1} × 100
Here, NAV is the Net Asset Value, which indicates the per-unit market value of the ULIP fund after deducting expenses.
You can also use a ULIP Calculator online.
Conclusion - Which is Better ULIP or SIP?
It may be difficult to conclude which is better out of the two options. Each investment offers unique benefits and caters to distinct needs. The right choice can be made depending on your individual goals. So, assess your needs carefully and then choose the option that suits you best.
People like you also read ...
